America's ‘Ultra Step’ gains traction

After the U.S. consumer price index June recorded much higher-than-expected 9.1 percent from a year ago in June, prospects that the Federal Reserve (Fed) will take the “Ultra Step” by raising the key interest rate by a 1 percentage point at the Federal Open Market Committee (FOMC) meeting to be held on July 26 and 27 are quickly becoming realistic. However, there are growing concerns that inflation, which is not budging much despite repeated interest rate hikes by the Fed, and intensive austerity measures will fuel an economic recession.

Shortly after the inflation rate was announced on Wednesday (local time), senior Fed officials mentioned the possibility of taking the Ultra Step one after another. Loretta Mester, president and CEO of the Federal Reserve Bank of Cleveland, told Bloomberg TV on Wednesday, "There is no reason for the Fed to raise rates less than last month. There are concerns about a recession, but if inflation is not curbed now, there will be bigger problems.” This means that the Fed, which took the Giant Step last month, referring to a 0.75-percentage-point increase, could raise interest rates by at least 0.75 percentage points or more this month.

However, there are continued concerns that a sharp monetary tightening will increase the pressure of the economic recession. The Fed said on the same day in its "Beige Book," which is a report on economic trends that the economy is slowing in many parts of the country, ascertaining that inflation has risen sharply, mainly for oil, food and housing. Long-term yield curve inversion, which is considered a sign of economic downturn, continues. The inversion rate of the 2-year Treasury yield and 10-year Treasury yield in the U.S. reached 0.22 percentage points on Wednesday, the highest since 2000.


Hyoun-Soo Kim kimhs@donga.com