MNI STATE OF PLAY: Fed To Lift Rates By Another 75 bps

The Federal Reserve is set to lift its benchmark policy rate by an unusually large 0.75 percentage point Wednesday for a second straight meeting and debate future increases as it continues to play catch-up in a bid to restore price stability.

The target range for the fed funds rate will rise to 2.25% to 2.50% after this week's move, entering the range of officials' estimates of a neutral policy setting.

As rates head into modestly restrictive territory, policymakers will have to decide whether to tamp down the pace of increases in September to 50 basis points and the appropriate pace of additional tightening needed to cool the overheated labor market and tame the surge in inflation without tipping the economy into recession.

Some former senior economists at the central bank told MNI the Fed has to raise rates higher than previously expected after CPI inflation accelerated to 9.1% last month. Officials in June projected rates would rise to 3.4% by year-end and 3.8% in 2023.

INFLATION MOMENTUM

Price pressures broadened and price increases accelerated since the Fed's June meeting, pointing to upside risk for inflation, St. Louis Fed research director Carlos Garriga said in an interview.

Core CPI is up 7.9% annualized over the past three months, outpacing its six-month and 12-month growth rates, and an Atlanta Fed economist noted that businesses' long run inflation expectations continued to move higher.

The University of Michigan survey of consumers' long-term inflation expectations fell to its lowest level in a year, but that also reflects more dispersion in beliefs, survey chief Joanne Hsu told MNI.

"Current inflation remains above where the committee would be at all comfortable," Richmond Fed research director Kartik Athreya told MNI.

NASCENT SLOWING

But Fed officials are also worried that U.S. financial conditions could tighten more quickly than expected in response to aggressive rate increases and balance sheet runoffs. Mortgage rates have climbed to 5.5% from 3% at the start of the year, the broad dollar index has appreciated 6% and the S&P 500 has fallen 18%.

Home sales, housing starts and permits as well as homebuilder confidence have fallen noticeably, and could lead the broader economy into a recession, National Association of Home Builders chief economist Robert Dietz told MNI.

Business sentiment has also deteriorated among firms in the western U.S., pointing to slower growth in the coming months, a San Francisco Fed economist told MNI, and some firms have frozen hiring plans or laid off workers. The unemployment rate has flattened out at 3.6% for four months after declining by 2.4 pp in the 12 months prior. Last week, initial jobless claims also hit their highest weekly level in eight months.

"You can begin to piece together the preliminary evidence that demand is coming off full boil," former Fed Board director of research David Wilcox said. "The Fed is aiming for a sustainable, comfortable temperature. But they don't want the economy to freeze over either."