San Francisco Frontiers - US central bank ponders huge rate hike to combat price surge

The central bank seemed set to increase the benchmark interest rate again by 0.5 percentage points, but a resurgence of consumer and producer prices in May has fueled growing speculation of a 75-basis-point hike.

While some economists continue to argue that such an aggressive step would indicate rising panic among policymakers who are usually reluctant to surprise financial markets, others argue that the Fed is behind the curve and needs to react strongly to prove its resolve to combat inflation

"It is possible that by Wednesday the only way for the Fed to surprise markets would be to raise rates by 50 bp," Harvard economist and former White House advisor Jason Furman tweeted.

If policymakers decide on a giant step, it would be the first 75-basis-point increase since November 1994.

The policy-setting Federal Open Market Committee is due to announce the rate decision at 1800 GMT at the conclusion of two days of deliberations.

Fed Chair Jerome Powell will hold a press conference after the meeting to provide more details on the central bank's plans.

President Joe Biden has fully endorsed the Fed's battle against the steepest rise in prices in more than 40 years, as he watches inflation erode his popularity and deflect attention from other milestones, including a rapid recovery of the world's largest economy and record job growth.

- Clear signals -

US central bankers began raising interest rates off zero in March as buoyant demand from American consumers for homes, cars and other goods clashed with transportation and supply chain snarls in parts of the world where Covid-19 remained -- and remains -- a challenge.

That fueled inflation, which got dramatically worse after Russia invaded Ukraine in late February and Western nations imposed steep sanctions on Moscow in response, sending food and fuel prices up at a blistering rate.

US gasoline prices have topped $5.00 a gallon for the first time ever and are setting new records daily.

Economists thought March was the peak for consumer price hikes, but the rate spiked again in May, jumping 8.6 percent in the latest 12 months, and wholesale prices surged as well, almost entirely due to soaring costs for energy, especially gasoline.

The Fed was caught off guard with the speed of the price increases, and while policymakers usually like to clearly signal any policy shift to financial markets, the latest data likely changed the calculus.

Powell had indicated policymakers were poised to implement another half-point increase in the benchmark borrowing rate this week and another next month, aiming to douse red-hot inflation without tipping the economy into recession and avoid a bout of 1970s-style stagflation.

"The 75bp hike... will be about making people/markets believe that they're serious about continuing to have higher rates in 2023," Furman said.

Markets are now pricing in at least one three-quarter-point hike by the end of the year and an aggressive path at the other four meetings.

Former New York Fed bank president William Dudley expects to see the super-sized increase.

"Fed officials are worried a bit about losing credibility," he said at an event hosted by The Wall Street Journal.

But neither the Fed nor the White House can have much immediate effect on many of the factors driving the price increases.

Biden on Tuesday blamed Russia for inflation, which is afflicting countries worldwide, and criticized Republicans for blocking his efforts to help American families feeling the pain.

Inflation is "sapping the strength of a lot of families," he told trade unions in Philadelphia. "Republicans in Congress are doing everything they can to stop my plans to bring down costs."

O.Green--SFF