Over the last few weeks, Federal Reserve officials seem to be falling all over each other in a competition over who can deliver the most Clint Eastwood–esque line about the ongoing effort to drive down sky-high inflation.
“This is a fight we cannot and will not walk away from,” said Fed governor Christopher Waller on Friday, lacking only the cheroot.
“Our resolve is firm, our goals are clear, and our tools are up to the task,” chimed in Fed Vice Chairman Lael Brainard.
Wall Street economists have gotten the message. In recent days, many have capitulated and updated their forecasts to predict the Fed will raise interest rates by an ultra-large three-quarters of a percentage point at its next policy meeting, just 10 days away. This would be a third straight move of a magnitude that was almost unheard of prior to this year.
That 75-basis-point rise would lift the Fed’s benchmark policy rate to a range of 3% to 3.25%.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said Fed Chairman Jerome Powell’s recent speech in Jackson Hole, Wyo., indicated his preference for another 0.75-percentage-point rate increase at the September meeting.
“With recent Fed-speak echoing these hawkish comments and incoming data doing nothing to dissuade officials from another supersized hike, we expect the Fed to deliver a third 75 [basis point] increase at the September FOMC,” Luzzetti said.
Jeff Cleveland, chief economist at Payden & Rygel in Los Angeles, agreed: “I think they go 75. Especially after the Bank of Canada went 75, the European Central Bank went 75. I mean, it’s an easy option.”
“I think most policy makers think they need to get to 4 [percent] or maybe higher so might as well get their quicker,” Cleveland added, referring to the targeted federal funds rate.
The 10-year Treasury yield
has risen for six straight weeks as traders have picked up on the Fed’s hawkish policy tilt.
All this tough talk has some economists starting to worry. Having been late to begin raising interest rates in face of rising inflation, the Fed, many fear, will compound the mistake in the opposite direction by tightening monetary policy too much.
“Unless there is very bad inflation news in the coming months, we hope central banks get away from this competition to see who can hike faster,” said Ethan Harris, head of global economics research at BofA Global Research, in a note to clients.
Guy LeBas, chief fixed-income strategist at Janney Securities, thinks it will all end in tears, he said. “The Federal Reserve will be hiking interest rates right up probably to the early parts of a recession. It is going to be a Jean-Claude Powell,” he said in an interview, referring to the European Central Bank’s decisions in 2008 and 2011 under Jean-Claude Trichet to raise interest rates during crises that were quickly reversed.
“A 75-basis-point rate hike in September pretty much seals a recession in 2023,” LeBas said. “The Fed has stabbed housing and it is just bleeding out.”
Research shows this is just a pivotal sector for the economy that when home prices decline, there will be cascading effects leading to a contraction in economic activity, he added.