Can the Fed Drive 75? Will It?

A lot of central bank observers think inflation is dire enough to go for the big 0.75 percentage point rate increase.

As the stock market sinks into the bear pit, one question is animating Wall Street today: Will the Federal Reserve’s policymaking panel hike its benchmark rate by 0.75 percentage point at its Wednesday meeting? Or stay with the previously telegraphed 0.50 point?

There’s growing sentiment on Wall Street and Washington that the Fed may impose the 0.75 point boost tomorrow.

Federal Reserve Chair Jerome Powell said last month that he wanted to “avoid adding uncertainty,” but also pointed to possible “further surprises” in inflation data. If astonishing inflation results occurred, he said the Fed would need to be “nimble.” Since then, he has had a heckuva surprise: The Consumer Price Index for May came in at 8.6%, versus 12 months before, far above what forecasters expected (8.1%).

So now, Barclays, Goldman Sachs, and JPMorgan Chase all expect a 0.75 percentage point hike tomorrow. “They’ve made it pretty clear that they want to prioritize price stability,” wrote Pooja Sriram, Barclays’ U.S. economist, in a note. “If that is their plan, a more aggressive policy stance is what they need to be doing.”

“This is when being nimble matters,” Diane Swonk, chief economist at Grant Thornton, told the New York Times. Choosing a 0.75 point hike “would underscore their commitment to avoid mistakes of the 1970s.” Back then, the Fed initially delayed acting on tightening policy, which let the inflation contagion worsen.

Marc Goldwein, senior policy director at the Committee for a Responsible Federal Budget, points to the shock of the most recent CPI reading and the ongoing dismay of Americans enduring gasoline topping $5 per gallon and grocery prices leaping 10%. The impact of that on consumers is why 0.75 is possible, he argues. “That would send a strong signal to the markets” that the Fed means business about combating inflation, he says.

The Fed had been indicating that it would proceed with half-point increases, and Goldwein thinks that is the most likely outcome tomorrow “by a small percentage” because of the Fed’s previous emphasis on this scenario.

But if the CPI continues on its current trajectory, he warns, it will hit 10.1% by year-end.