Fed likely to hike rates by three-quarters of a point this week

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Markets are beginning to anticipate an even faster pace of interest rate hikes, and Federal Reserve officials apparently are contemplating the possibility as well.

Central bank policymakers are entertaining the idea of a 75 basis point increase to the Fed’s benchmark funds rate that banks charge each other for overnight financing, according to CNBC’s Steve Liesman.

“My reporting is that a 75-basis-point rate hike will be announced on the second day of this week’s meeting, is very likely, a real distinct possibility,” Liesman said. “I know that Powell said the committee back in May was not actively considering it, but he also said that they were looking at the economy, and I think the economy has changed to the point in my reporting, such at this point, I’d be dialing in to 75 if I were a betting man at this point, not at 50.”

An earlier Wall Street Journal story Monday afternoon first reported the change in central bank stance. The fed funds rate feeds through to many consumer products that are based on adjustable rates, such as mortgages and credit cards.

In recent days, traders in the interest rate futures market have been cranking up their bets that the Fed will go beyond its traditional 25-basis-point hiking pattern.

Recent jumps in bond yields have pointed to the possibility of a more aggressive Fed at the conclusion of the two-day Federal Open Market Committee meeting Wednesday.

The 10-year Treasury yield shot up to 3.37% Monday, a surge of 21 basis points, while the 2-year yield, which mostly closely tracks Fed intentions, accelerated to 3.34%, a jump of nearly 30 basis points. A basis point is one one-hundredth of a percentage point.

The Fed uses interest rate increases as a way to tamp down demand, which has generated inflation levels running at more than 40-year highs. Markets expect the central bank to continue jacking up rates through at least the end of the year as it tries to pull inflation down nearer its 2% target.

The Journal report did not cite any specific sources for its reporting but said that officials could reconsider their stance on rates in light of several recent reports showing that inflation is not only high historically but is continuing to push upward. The Fed is in its quiet period ahead of the two-day Open Market Committee meeting that opens Tuesday, so officials can’t comment on policy.

Friday’s consumer price index report showed headline inflation in May running at an 8.6% pace. A separate survey from the New York Fed released Monday indicated that one-year inflation expectations are at 6.6%, tied for a record in a data series that goes back to 2012.

The roots of inflation are multi-pronged: Clogged supply chains are pushing up prices, while energy prices are rising due to decreased production, a situation aggravated by the Russian attack on Ukraine. A supply-demand mismatch in the labor market also is fueling much higher wages, which in turn are leading to price increases.

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