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Fed set to debate faster tightening as it tries to catch up to soaring inflation

The Federal Reserve will discuss this week whether to accelerate the pace of monetary tightening in the face of what appears to be deteriorating inflation.

The Federal Open Market Committee will meet on Tuesday for a two-day meeting, just days after two economic reports suggested that price pressures have become more relentless than expected.

Before Friday’s data — which showed prices rose another 1 percent in May from just a month ago and consumers grew increasingly concerned that high inflation will remain an issue for longer — the Fed had indicated it was ready was to have a second consecutive semi-annual increase in the points rate. It would be the first time since 1994 that the US central bank has chosen to raise interest rates by that amount in successive meetings.

But another tool, also last used in 1994, is now likely to be considered: raising rates by 0.75 percentage point.

Markets have now fully priced in that outcome, following a report from The Wall Street Journal that suggested officials would discuss the possibility this week.

JPMorgan’s chief economist Michael Feroli has raised the bank’s call for its upcoming meeting to 0.75 percentage point. Krishna Guha, vice-chairman at Evercore, said it was “not what we think is the optimal policy and, apart from that, not good for the markets,” which were ravaged Monday by mounting fears of inflation.

Economists are also grappling with what to expect after the meeting as the central bank faces more inflation shocks that have raised doubts about whether it is acting fast enough to address what is already becoming a persistent problem. .

The central bank has committed to moving “quickly” to a neutral environment — one that does not encourage or slow growth — although Fed Chair Jay Powell recently admitted that that threshold “isn’t something we can do with any precision.” identify”. Instead, he promised to continue until there is “clear and convincing” evidence that inflation is moderating.

Central bankers will outline their predicted policy path in an updated “dot plot” released on Wednesday, which charts individual interest rate projections as part of a broader set of estimates on the economic outlook. In the most recent set of forecasts, published in March, top officials projected a key interest rate of 1.9 percent by the end of the year and 2.8 percent in 2023.

Policymakers will also release updated forecasts for inflation, growth and unemployment, which are expected to reflect Powell’s recent admission that the measures needed to tame price pressures will lead to “some pain.”

Economists disagreed with March estimates, which suggested the unemployment rate showed little shift from historically low levels, even as policies tightened considerably.

Powell has since acknowledged that the unemployment rate is likely to rise “a few taps” and that the central bank may only be able to achieve a “soft” landing for the economy — a report chalked by Gargi Chaudhuri, head of iShares investment strategy for the Americas at BlackRock. to, “We can’t have all the guns burning now without some spillover.”

The average unemployment rate is expected to reach about 3.8 percent in 2024, 0.2 percentage points higher than its current level, while officials are likely to push inflation closer to 5 percent this year.

A more substantial slowdown in gross domestic product growth is also expected. That, in turn, has increased the likelihood that some policymakers will forecast outright rate cuts in 2024, reflecting a belief that the economy will have slowed significantly by then.

A recent poll of leading academic economists by the Financial Times showed that nearly 70 percent believe the US economy will plunge into recession next year.

Priya Misra, head of global interest rate strategy at TD Securities, said the Fed is now grappling with a much tougher problem than it was a few months ago. “They now have two-sided risks with growth and inflation,” she said.

For Stephanie Aaronson, another former Fed employee who now works at the Brookings Institution, the central bank will need a lot of luck to avoid a hard landing.

“If they don’t get a lot of help on the supply side in the form of energy and food price relief. † † and they really need to do a lot more work to drive down inflation themselves, they couldn’t do that with a soft landing.”

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