May’s inflation figures came out last week and showed no sign of inflation easing.
Inflation in May reached 8.6%, its highest level in more than four decades, up from 8.3% in April.
On Wednesday, the central bank’s Federal Open Market Committee will agree on a rate increase. As inflation is not responding to the Fed’s prior increases, investors increasingly believe the FOMC could raise rates by 0.75%.
FedWatch tool shows investors are split 50/50 on whether the Fed will raise rates by 0.75.
Investors now also believe the chance of a 0.75% increase in June or July is 88%, showing the market believes the Fed will have to step up its rate increase to curtail inflation.
As the Federal Reserve increases rates more rapidly than expected, the odds of a recession also increase.
“It’s a one-two punch […] They’ve got to go now with 75. The Fed is behind the curve, and they know it”, Diane Swonk, chief economist at Grant Thornton told the Wall Street Journal.
“The data now is not good. The data is saying they have to do more […] We’re moving into a more inflation-prone world, and they know that, and if they don’t derail it now, this could be incredibly corrosive”, she added.
While rates increase might help ease some demand-driven inflation, it will not curb the energy price increases which are due to geopolitical factors and policy decisions. Economists expect the inflationary pressure to remain until at least 2023.
The Fed’s aggressive rate increase will also affect the housing market, which saw unprecedented demand in the pandemic years. As the cost of borrowing increases, buyers are expected to thin out, and prices are likely to stabilize.