After key Federal Reserve officials opened the door to raising interest rates by more than the customary quarter-percentage point, several of Wall Street’s biggest banks now believe the increases will come in jumbo increments.
Major banks in recent days have predicted some combination of half-percentage point rate rises by the Fed throughout the year. The Fed usually moves its federal-funds rate target by quarter-percentage point increments, but faced with surging inflation bringing the worst price pressures in 40 years, economists believe aggressive action by the central bank is now likely.
The Fed lifted the federal-funds rate earlier this month for the first time since 2018, to a range of between 0.25% and 0.50%. The Fed’s next meeting is scheduled for May 3-4, and it is likely to result in a half-percentage point increase, with more such increases later in the year, in the view of many large banks.
“It’s pretty clear that Fed officials have an itch to hike by 50 basis points,” J.P. Morgan economist Michael Feroli wrote in a note to clients Wednesday. “Not wanting to fight the Fed or their itches, we are now replacing our expectations for 25 basis point hikes in May and June with 50 basis point moves, reverting to 25 basis point hikes in July and thereafter.”
Mr. Feroli also wrote that the funds rate should reach just under 3% by next year.
Last week, economists at Citibank said in a research note that they see half-percentage point increases at the May, June, July and September meetings of the Federal Open Market Committee. Bank of America still expects a quarter-percentage point increase in May but thinks half-percentage point increases will kick in at the June and July meetings. Goldman Sachs said earlier this month that half-percentage point increases are likely in May and June.
Tim Duy, chief economist at SGH Macro Advisors, told clients Tuesday that for the May FOMC meeting “incoming inflation and jobs data will almost certainly support the [50 basis point] move, and more importantly [Fed Chairman Jerome] Powell likely supports it as well.”
Mr. Powell paved the way for the shift in forecasts. On March 21, Mr. Powell said that “we will take the necessary steps to ensure a return to price stability,” and he added that “if we conclude that it is appropriate to move more aggressively by raising the federal-funds rate by more than 25 basis points at a meeting or meetings, we will do so.”
Last Friday, New York Fed leader John Williams also opened the door to aggressive action, saying “if it’s appropriate to raise interest rates by 50 basis points at a meeting, then I would think that we should do that. If it’s appropriate to do 25 [basis points] then we should do that.” Mr. Williams also serves as vice chairman of the FOMC.
Other Fed officials have also expressed similar views or even outright support for half-percentage point increases.
St. Louis Fed leader James Bullard, who dissented at the March FOMC meeting in favor of more aggressive action, has said big rate rises are key to addressing the inflation surge.
Last week, Cleveland Fed leader Loretta Mester, an FOMC voter this year, told reporters “I think we’re going to need to do some 50-basis-points moves,” while Chicago Fed leader Charles Evans said such a move could be part of a campaign of “many” interest rate increases.
“Given the pressures that I see, I would be comfortable with just each meeting increasing by a quarter-point,” Mr. Evans said, adding “maybe a 50 [basis-point rate hike] helps…I’m open-minded about that.”
For some Fed officials, it is important to shift monetary policy from its still stimulative stance to something approaching neutral, which is likely between 2% and 2.5%. Then, they can take stock of whether they need to go beyond that to slow the economy, hoping that doing so will ease price pressures.
Futures markets also place high odds on a 50-basis point increase in May, with federal-funds futures contracts showing on Thursday a nearly 70% probability of such a move.