Markets are beginning to anticipate an even faster pace of interest rate hikes, and Federal Reserve officials apparently are contemplating the possibility as well.
Central bank policymakers are entertaining the idea of a 75 basis point increase to the Fed’s benchmark funds rate that banks charge each other for overnight financing, according to a Wall Street Journal report Monday afternoon. The rate feeds through to many consumer products that are based on adjustable rates, such as mortgages and credit cards.
In recent days, traders in the fed funds futures market have been cranking up their bets that the Fed will go beyond its traditional 25-basis-point hiking pattern.
While 50 basis points remains the most likely case following the two-day Federal Open Market Committee meeting that concludes Wednesday, bond yields pointed to the possibility of a more aggressive Fed.
The 10-year Treasury yield shot up to 3.37% Monday, a surge of 21 basis points, while the 2-year yield, which mostly closely tracks Fed intentions, accelerated to 3.34%, a jump of nearly 30 basis points. A basis point is one one-hundredth of a percentage point.
The Fed uses interest rate increases as a way to tamp down demand, which has generated inflation levels running at more than 40-year highs. Markets expect the central bank to continue jacking up rates through at least the end of the year as it tries to pull inflation down nearer its 2% target.
The Journal report did not cite any specific sources for its reporting but said that officials could reconsider their stance on rates in light of several recent reports showing that inflation is not only high historically but is continuing to push upward. The Fed is in its quiet period ahead of the two-day Open Market Committee meeting that opens Tuesday, so officials can’t comment on policy.
Friday’s consumer price index report showed headline inflation in May running at an 8.6% pace. A separate survey from the New York Fed released Monday indicated that one-year inflation expectations are at 6.6%, tied for a record in a data series that goes back to 2012.
The roots of inflation are multi-pronged: Clogged supply chains are pushing up prices, while energy prices are rising due to decreased production, a situation aggravated by the Russian attack on Ukraine. A supply-demand mismatch in the labor market also is fueling much higher wages, which in turn are leading to price increases.