Desperate times call for desperate measures, and times, arguably, are increasingly desperate. Persistent high inflation could force the Federal Reserve to make the biggest increase in key US interest rates in more than 40 years.
After another dismal U.S. inflation report, economists at brokerage Nomura Securities were the first on Wall Street’s DJIA on Tuesday.
to predict a full percentage-point increase in the Fed’s benchmark short-term rate.
“We continue to believe that markets are underestimating how entrenched US inflation is and how slow the rate of response from the Fed will be required to address it,” Nomura economists wrote in a note to clients.
The last time the federation took such drastic measures was in 2011. It was the early 1980s – another period of 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.
The consumer price index rose a modest 0.1 percent in August, driven by another big drop in energy prices. And annual inflation dropped slightly to 8.3% from 8.5%.
But that was almost all the good news. The price of everything including food, rent, clothing, furniture, cars, medical care and so on has increased in the last month.
watch out Fuel costs continue to contribute to rising food costs.
The result: The Fed’s rate gauge, another indicator of future inflation, rose sharply in August to its fastest annual pace in five months.
Core consumer inflation rose to 6.3% from an annualized rate of 5.9% in August, according to data from the Bureau of Labor Statistics.
The backup in the main speed is a call for bold action, Nomura said. “We believe that more aggressive interest rates are needed to combat the rising inflation associated with higher temperatures,” the company’s analysts wrote.
The federal funds rate, the central bank’s short-term rate, now hovers in the 2.25% to 2.5% range. The cost of most consumer and business loans is tied to that amount.
Nomura forecasts an increase to 3.5% from 3.25% at the Fed’s policy meeting this week, and the Fed will eventually raise that key rate to 4.75% in 2023, in Nomura’s view.