Federal Open Market Committee Is Expected to Raise Rates By 0.75% In Their Two-Day Meeting

As the Federal Reserve’s Federal Open Market Committee (FOMC) begins its two-day meeting today, many observers expect it to announce another 75% rate hike on Wednesday.

A third consecutive 0.75% increase in Federal Funds interest rates would be a series not seen since the 1970s. 

While some observers believed the Fed was announcing a 1% increase, futures trading firm CME Group said investors in the interest of the market for futures see an 82% to 0.75% probability in more and only an 18% chance of full. 1% more.

The Mortgage Bankers Association (MBA) said it expects the Fed to continue raising interest rates in 2022, hitting a target of between 3.25% and 3.5% by the end of the year. Others suggest the target rate will be set higher after this week’s session, perhaps between 4% and 4.25%.

Mortgage rates have risen since the Fed began raising rates in May, hitting 6% last week for the first time since 2008. 

As the FOMC meets, it faces strong inflationary pressures that have defied efforts to keep it within the Fed’s 2% target rate. 

The consumer price index (CPI) rose 0.1% seasonally adjusted in August from July but remained unchanged from July to June. However, the annual CPI rate fell to 8.3% in August, the second consecutive increase in the annual rate after reaching 9.1% in June – the highest rate in 12 months, which ended in November 1981. 

Core inflation, excluding food and energy variables, increased by 0.6% in August compared to the previous month. 

This is driven by the housing index, which increased by 0.7% in July, the highest monthly increase since 1991. 

During the year, the number of homes increased by 6.2%. In a comment titled “The Fed Cannot Reduce Inflation by Reducing It,” published Monday by the Wall Street Journal, two economists suggested that the Fed needs this effort to get more attention to bring the hike back to the 2% target.

André T. Levin, professor of economics at Dartmouth College, and Mickey D. Levy, an economist at Berenberg Capital Markets, are both members of the Open Market Shadow Committee, a group of economists formed in 1973 to bring a different perspective to the economy and the market to offer The finances of the Fed. Policy. Government.

They note that even if energy and raw material prices fall, labor costs will remain stable because house prices – which they describe as “the largest component of house prices consumption” – continue to increase. rising. It has grown at an annual rate of 7.6% over the past four months, they said.

“The Case-Shiller index, which tracks real estate prices, has risen more than 40% over the past two years. Home construction and sales are currently slowing, but a further recovery in rents is still possible. 

They cite what they call “critical pitfalls” in how the Fed fights inflation – “it focuses on interest rates rather than floating rates, the traditional barometer for gauging growth.” of the Fed’s monetary policy.

According to them, the Fed is anticipated to increase the federal funds rate by 75 basis points to 3.25%. However, real interest rates will remain negative, making Fed policy inconsistent with its objectives. 

“The differential between interest rates and real interest rates will continue to pose the risk of the Fed repeating the mistakes that led to double-digit interest rates in the 1970s.”

The two economists believe that the Fed should clarify its inflation policy “using simple indicators like the Taylor rule, a well-established guideline for adjusting interest rates in response to changes in economic activity and inflation.”

American economist John B. Taylor, economic adviser to Presidents Ford and George H.W. Buisson proposed this law. It requires the interest rate to be slightly higher if the actual interest rate is higher than the target interest rate.

“The Fed publishes the Taylor rule and other policy indicators in its semiannual report to Congress,” economists said. “It should use these indicators to guide its policy of restoring price stability.”