Most U.S. financial markets slipped in early-morning trades on Tuesday as investors awaited the Federal Reserve‘s next interest rate hike. The central bank is expected to raise rates by 75 basis points at Wednesday’s meeting.
Investors Prepare For The Next Rate Hike
The Fed has been hiking rates to combat inflation but so far has failed to rein it in. Inflation surprised economists in June by accelerating again and reaching yet another 40-year high. Meanwhile, the job continues to grow rapidly, suggesting economic strength amid the soaring inflation.
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As a result, pressure on the Fed is heating up as economists call on regulators to be aggressive with their rate hikes to bring demand under control and slow the skyrocketing prices that are weighing on U.S. consumers.
The Fed Deals With Inflation Amid A Slowing Economy
Despite the signs that the economy is slowing, the Fed is focused on bringing down persistently high inflation, even if a recession results from those moves. Fed Chair Jerome Powell said last month that it would be a "bigger mistake" if they failed to stabilize prices rather than crushing growth and triggering an economy downturn.
Fed policymakers hiked the benchmark rate by 75 basis points last month, the first time it has done that since 1994. They also suggested the possibility of a rate hike of the same size in July. Despite the Fed's efforts, inflation was hotter than economists had expected in June as the consumer price index rose 9.1% year over year in June.
That rate marks the fastest pace of inflation recorded since December 1981. While the consumer price index includes things like rents, grocery prices and gasoline, core inflation excludes groceries and energy prices, which tend to be more volatile. Core inflation rose 0.7% month over month, accelerating from April's and May's readings. That suggests inflation is getting stickier as it spreads across the economy.
How Aggressive Will The Fed Be?
Due to the skyrocketing inflation, which has resisted the efforts to bring it under control, the Fed is expected to hike interest rates by three-quarters of a point again following its two-day meeting on Wednesday. That would be the fourth straight increase since March and raise the Fed's key rate target up to a range of 2.25% to 2.5%, the highest since the beginning of the pandemic over two years ago.
However, the Fed could be even more aggressive with this week's rate hike, potentially boosting it by 100 basis points. According to Fox Business, investors raised their expectations for an increase of a full percentage point after the Labor Department reported blisteringly hot jobs numbers.
About 25% of traders are now expecting the Fed to hike rates by a full percentage point. If the central bank follows through with that, it would be the first rate hike of that size since the Fed began announcing changes in the overnight federal funds rate in 1995. It would also place the benchmark range at 2.5% to 2.75%.
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