Desperate times call for desperate measures, and times are certainly getting more desperate. Persistence of high inflation could force the Federal Reserve to resort to the largest increase in a key US interest rate in more than 40 years.
After another U.S. inflation report, economists at brokerage Nomura Securities became first on Wall Street DJIA on Tuesday,
to predict a full percentage point increase in the Fed’s short-term benchmark rate.
“We continue to believe markets are underestimating how entrenched US inflation has become and the magnitude of the response likely to be required from the Fed to dislodge it,” Nomura economists wrote in a note to clients.
The last time the Fed made such a drastic move was in the early 1980s, another period marked by sky-high inflation.
At each of the last two meetings, the Federal Open Market Committee, which sets monetary policy, raised the target rate by 0.75 points.
In August, the consumer price index rose a scant 0.1%, largely due to another big drop in energy prices. And the annual pace of inflation slowed a bit from 8.5% to 8.3%.
But that was pretty much all the good news. The cost of almost everything went up last month, including food, rent, clothing, furniture, cars, medical care, and more.
I will see: Fuel costs continue to contribute to rising food costs
The result: Another measure of prices seen by the Fed as a better indicator of future inflation trends rose sharply in August to the highest annual rate in five months.
The so-called core rate of consumer inflation rose to an annual rate of 6.3% in August from 5.9% the previous month, according to data from the Bureau of Labor Statistics.
Backing up the base rate is a call to bolder action, Nomura said. “We believe it is increasingly clear that a more aggressive path of interest rate hikes will be needed to combat increasingly entrenched inflation stemming from an overheated labor market, unsustainably strong wage growth and higher inflation expectations “, the firm’s analysts wrote.
The federal funds rate, the central bank’s short-term rate, now hovers between 2.25% and 2.5%. The cost of most consumer and business loans are tied to this rate.
Nomura predicts the rate will rise to a range of 3.25% to 3.5% at the Fed’s policy meeting this week, and the Fed, in Nomura’s view, will ultimately instance, it will increase this key rate to 4.75% in 2023.