After raising rates by a half point in May — an action the Fed hadn’t taken since 2000 — Chair Jerome Powell pledged more of the same until the central bank was satisfied that inflation was under control. At that point, the Fed would resume standard quarter-point hikes, he said.
But after May’s hotter-than-expected inflation report, Wall Street is increasingly calling for tougher action from the Fed to keep prices under control. Goldman Sachs on Tuesday joined Jefferies and Barclays in predicting that the Fed would hike rates by three quarters of a point, also referred to as 75 basis points, this week.
“Definitely, we’re going to see 75 basis points after this meeting,” Bill Dudley, the former president of the New York Federal Reserve Bank, told CNN. “I think they wanted to make sure that they were not following farther behind the curve, so they had some conversations with some key journalists.”
“The big surprise now would be if they went back to 50 basis points,” Dudley said.
Not only is Wall Street convinced that the Fed will take more severe action against inflation Wednesday, it also believes that it will raise rates by another three-quarters of a point in July. Nearly 90% of investors believe the Fed will hike rates by that same amount next month, following similar expectations from Goldman, Jefferies and Barclays.
Such strong medicine for inflation could pose a threat to the US economy, however. In a note to clients Tuesday, Goldman analysts warned tightening financial conditions could further drag growth “somewhat beyond” what the Fed “should be targeting to have the best chance of bringing down inflation without a recession.”
That could make the elusive “soft-landing” that Powell has aimed for all but impossible to achieve. When the Fed raises rates, it almost always crash-lands the economy into a recession. But there have been rare instances when the Fed has cooled off the economy and kept prices in check without sending the US economy spiraling into a downturn: Once in 1965, and again in 1984 and 1994.
— CNN Business’ Paul R. La Monica, Nicole Goodkind and Matt Egan contributed to this report