Desperate times call for desperate measures and this may be one of those times. Persistently high inflation could force the Federal Reserve to resort to the biggest increase in the US’s main interest rate in more than 40 years.
firm to forecast a full one percent increase in the Fed’s benchmark short-term interest rate.
“We continue to believe that markets are underestimating how entrenched US inflation is and the magnitude of the response likely to be required by the Fed to dislodge it,” Nomura economists wrote in a note to clients.
The last time the Federal Reserve took such a drastic move was in the early 1980s, another period marked by runaway inflation.
In the last two meetings, the Fed raised its interest rate by 0.75 points.
In August, consumer price index rose just 0.1% largely because of another big drop in oil prices. And the annual rate of inflation slowed slightly to 8.3% from 8.5%.
But that was pretty much all the good news. The price of almost everything went up last month, including food, rent, clothes, furniture, cars, medical care, and so on.
The result: Another price gauge, seen by the Fed as a better indicator of future inflation trends, rose sharply in August to its highest annual rate in five months.
The so-called core rate of CPI inflation rose to an annual rate of 6.3 percent in August from 5.9 percent the previous month. Read more about the alarming rise in core CPI
The backup in prime speed is a call to bolder action, Nomura said.
“We believe it is becoming increasingly clear that a more aggressive path of raising interest rates will be needed to combat the strengthening inflation stemming from an overheating labor market, unsustainably strong wage growth and higher inflation rates.” expectations,” wrote the companies’ analysts.
The central bank’s short-term interest rate, known as the fed funds rate, now hovers in a range of 2.25% to 2.5%. The cost of most consumer and business loans is tied to the interest rate.
Nomura forecasts that the rate will be raised to a range of 3.25% to 3.5% at the Fed’s policy session next week and will continue to rise until it reaches 4.75% in 2023.