The stubbornly high inflation in the United States has increased bets that the Fed will become more aggressive in tightening its monetary policy. The Federal Reserve is bent on cooling price pressures and it believes it can accomplish this by making a jumbo-sized hike in the interest rates in the next few months.

Current Interest Rate Trends

The policymakers of the central bank have already indicated that they intend to hike the interest rate by 50 basis points in their meeting this week on Wednesday. Another hike is also expected in late July and balance sheet reductions have also been made in this month. This is more tightening in the monetary policy that the Federal Reserve has done in the last three months than it did in the entire year of 2018.

On Friday, traders had begun to price in even higher hikes in futures that are connected to the policy rate of the Fed. This is because the data from the US Labor Department indicated that the consumer price index had gone past 8.6% in the previous month because of record prices of fuel and high food costs. A separate survey from the University of Michigan also showed that the expectations of long-term inflations had risen to the highest level since 2008.

Market analysts said that the inflation data was likely to be a game-changer and would drive the Federal Reserve into opting for a front-load and higher gear policy tightening. Most economists believe that the Fed will still hike the interest rate next week by half a point and would do the same in all the meetings until September. The core CPI had gone up by 6% in May, excluding food and fuel prices. It was down from 6.2% in April, but still not enough to convince the Fed to slow down their policy tightening. Economists are now predicting that rates would reach 4.125% halfway through 2023.

Next Meeting of the Fed

The meeting of the Fed policymakers this week will see them disclose how high the interest rates need to go in the short-term. Currently, the unemployment rate stands at 3.6% and the policymakers will also give forecasts on how much it needs to rise before there is enough slowdown in the economy to bring inflation down.

In the last few weeks, some people had been hoping that the Fed would hit pause on the rate hikes by September because prices would come down, but that does not seem to be happening any time soon. This is in light of the inflation report on Friday.

There had been a fall in prices of used cars, but there was a trend reversal, as they climbed by 1.8%. There was also a 12.6% increase in airline fares as opposed to a month earlier and a 37.8% increase as opposed to last year. There was also a 5.5% increase in the prices for shelter, which is the highest jump recorded in the last thirty years.

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