The Federal Reserve could respond to the surge in inflation with its steepest interest rate increase since 1994. At its policy meeting on Wednesday, the central bank may opt to raise rates by 0.75 percentage points, rather than the half-point that has been signaled for weeks.
Why it matters: If the Fed opts for the more aggressive move Wednesday, it would amount to stepping away from the slow-and-steady rate rising campaign, and an escalation of the central bank's war against inflation — one that is already causing steep drops in asset prices and rising recession risk.
- Such a move would diverge from the Fed's practice in recent years: only taking policy moves that have been telegraphed far in advance to avoid unnecessarily disrupting markets.
- The Wall Street Journal on Monday first reported on the possibility 0f an 0.75 percentage point rate hike, which triggered a steep rise in bond yields as traders priced in the possibility.
The steeper rate hike will be on the table at the Federal Open Market Committee meeting starting Tuesday afternoon, with a real possibility of pulling the trigger. The decision will be announced at 2:00p.m. ET Wednesday.
State of play: The news around inflation has worsened even since the Fed entered its customary "blackout period" 10 days ago, when officials do not give speeches or interviews discussing monetary policy in the runup to a policy meeting. ...
- Most significantly, the Consumer Price Index for May far exceeded expectations, with a broad-based surge in prices.
- But also notably, there have been new signs that inflation expectations are coming unglued, which sets off alarm bells among