Desperate times call for desperate measures, and times are, arguably, increasingly desperate. Continued high inflation could force the Federal Reserve to resort to the largest hike in a major US interest rate in more than 40 years.
After another dismal inflation report in the US, economists at the brokerage Nomura Securities became the first on Wall Street DJIA on Tuesday,
to forecast a full percentage point increase in the Fed’s short-term benchmark interest rate.
“We continue to believe that markets are underestimating entrenched US inflation and the magnitude of the response likely needed by the Fed to drive it out,” Nomura economists wrote in a report to customers.
The last time the Fed made such a drastic move was in the early 1980s – another period marked by skyrocketing inflation.
At each of the last two meetings, the monetary policy-determining Federal Open Market Committee raised the target rate by 0.75 points.
In August, the consumer price index rose by a paltry 0.1%, largely as a result of another sharp drop in energy prices. And the annual inflation rate slowed down 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 so on.
To see: Fuel costs continue to contribute to rising food costs
The result: Another price measure seen by the Fed as a better indicator of future inflation trends rose sharply in August, reaching its highest annual rate in five months.
According to data from the Bureau of Labor Statistics, the so-called core consumer inflation rate in August rose from 5.9% in August to an annual rate of 6.3%.
The backup in the core tariff is a call for bolder action, Nomura said. “We believe it is becoming increasingly clear that a more aggressive path of rate hikes will be needed to combat the deepening inflation resulting from an overheated labor market, unsustainably strong wage growth and higher inflation expectations,” the company’s analysts wrote.
The Federal Funds rate, the central bank’s short-term interest rate, now hovers between 2.25% and 2.5%. The cost of most consumer and business loans is tied to that rate.
Nomura predicts that rates will be hiked to a range of 3.25% to 3.5% at the Fed’s policy meeting this week, and that the Fed will eventually push that key rate to 4.75% by 2023, Nomura says. .