When the Federal Reserve started to raise its benchmark policy interest rate by super-sized 0.75 percentage points in June this year, a few Fed officials and private sector economists talked about how it might be difficult for the central bank to slow down from that pace of increases.
This conundrum has risen to the forefront in the wake of Thursday’s higher-than-expected U.S. consumer price inflation report for September.
Core inflation, excluding food and energy prices, accelerated again, led by the service sector where inflation is notoriously difficult to tame.
As a result, a fourth consecutive 0.75 percentage point increase in the federal funds rate is all but certain at the Fed interest-rate committee’s next meeting in early November.
And now economists are starting to expect a fifth 0.75 basis-point hike at the last FOMC meeting of the year in mid-December.
“The FOMC was probably already pretty much locked in to a 75 basis point rate hike at the next meeting on November 2, but if there was any doubt, this should resolve it,” said Stephen Stanley, chief economist at Amherst Pierpont.
” Now, the next question that financial market participants will need to consider is: can the Fed afford to slow down the pace of rate increases in December,” he added.
The Fed signaled in their latest “dot-plot” projection for the benchmark interest rate that they were penciling in slowing to a 50 basis point rise by year-end and another 25 basis point move next year.
All that is in doubt after Thursday’s CPI reading.
Economists at Barclays have raised their December rate hike forecast to 0.75 percentage points from a half-percentage point.
Stanley noted that when he projected that the fed funds rate would peak over 5%, he was an outlier.
“We are not far from that becoming the consensus,” he noted.
Indeed Barclays expects the Fed’s benchmark rate to peak in a range of 5%-5.25% in February.
Stanley said core inflation doesn’t look like it will cool anytime soon.
“If so, we are going to enter a perilous time in a few months, when the Fed believes that they have raised rates by enough to eventually bring inflation down but the labor market and inflation numbers are giving them absolutely no cover to stophiking,” he said.
“If you thought financial markets have been volatile in recent months, buckle up because it could get even bumpier,” he added.