Home Business The biggest Fed rate hike in 40 years? It might be coming

The biggest Fed rate hike in 40 years? It might be coming

The biggest Fed rate hike in 40 years? It might be coming

Desperate times call for desperate measures, and this might be one of those times. Persistently high inflation might force the Federal Reserve to resort to the biggest increase in a key U.S. interest rate in more than 40 years.

After another dismal U.S. inflation report, economists at the Brokerage Nomura Securities on Tuesday became the first Wall Street

firm to predict a full one-percentage increase in the Fed’s benchmark short-term rate.

“We continue to believe markets underappreciate just how entrenched U.S. inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” the economists at Nomura wrote in a report to clients.

The last time the Fed made such a drastic move was in the early 1980s — another period marked by sky-high inflation.

In the last two meetings, the Fed raised its rate by 0.75 points.

In August, the consumer price index rose a scant 0.1% largely because of another big drop in oil prices. And the yearly pace of inflation slowed a bit to 8.3% from 8.5%.

But that was virtually all of the good news. The cost of almost everything rose last month, including food, rent, clothes, furniture, cars, medical care and so forth.

The result: Another price measure viewed by the Fed as a better indicator of future inflation trends rose sharply in August and hit the highest yearly rate in five months.

The so-called core rate of CPI inflation climbed to a yearly pace of 6.3% in August from 5.9% in the prior month. Read more on the alarming increase in the core CPI

The backup in the core rate is a call to bolder action, Nomura said.

“We believe it is increasingly clear that a more aggressive path of interest rate hikes will be needed to combat increasingly entrenched inflation stemming from an overheating labor market, unsustainably strong wage growth and higher inflation expectations,” the firms analysts wrote.

The central bank’s short-term rate, known as fed funds, now hovers between a range of 2.25% to 2.5%. The cost of most consumer and business loans are tied to the rate.

Nomura predicts the rate will be increased to a range of 3.25% to 3.5% at the Fed’s strategy session next week, and keep going up until it hits as high as 4.75% in 2023.

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