Fed highly likely to take ‘giant step’ in June and July

Despite the Fed’s repeated increase of interest rates, inflation remains still high, and economists now foresee a “giant step” of a 0.75 percentage point hike at the FOMC meeting scheduled to take place on Tuesday and Wednesday. The Fed may take an interest rate hike in July as well, according to some analysts.

The Biden administration and the Fed are under fire for having underplayed the inflation warning that resulted from the injection of massive liquidity as a response to the COVID-19 pandemic and having ended up being at fault with its monetary policies, having no choice but to take a giant step that will destabilize the financial market.

The Fed Watch of the Chicago Board of Trade, which foresees future monetary policies through interest rate futures, reported that 92.5 percent of economists forecasted that the U.S. base interest rate, which was standing at 0.75 to 1 percent as of 1 a.m. on Tuesday, will increase up to 1.5 to 1.75 percent after FOMC meeting. The likelihood of the interest rate hike at FOMC in July to 2.25 to 2.5 percent amounts to 79.7 percent. Chief U.S. Economist at J.P. Morgan Michael Feroli said that an increase of 100 basis points at the FOMC is “a non-trivial risk.”

U.S. consumer expectations for inflation in the year ahead, which was announced by the New York Federal Reserve on the day, was 6.6 percent, tying with March for the highest rate on record since the survey started in June 2013.

Fears of a recession due to excessive interest rate hikes are growing. Morgan Stanley CEO James Gorman said on Monday he used to see 30 percent recession risk, but now he sees 50-50 odds of recession ahead. J.P. Morgan Chase CEO Jamie Dimon also warned of an economic hurricane on the horizon.


Jae-Dong Yu jarrett@donga.com