50 or More?

All eyes will be on the results of the Federal Reserve meeting on Wednesday when it announces how much it's going to raise short-term rates, its new projections for the economy and short-term rates for the next few years, as well as Chairman Powell's press conference.

After the last meeting in May, Powell made it very clear the Fed anticipated raising rates by half a percentage point (50 basis points, or bps) at each of the next two meetings: this week's event and in July. When asked about a larger rate hike, Powell was dismissive.

But after Friday's news that consumer prices rose 1.0% in May and are up 8.6% versus a year ago – the most in more than forty years – the futures market in federal funds is pricing in moves of at least 50 bps this week and in July.

A widely known investment TV celebrity says the Fed should go 100 bps all at once on Wednesday. We would fully support a 100 bps rate hike this week, or even more. In fact, we were calling for an even sharper rate hike and a faster pace of Quantitative Tightening back in March, before it was cool to act tough.

We would not be shocked if the Fed raised rates by more than 50 bps on Wednesday but think it will more likely stick with 50 bps only. Why? Remember that Powell was emphatic back in May that the Fed did not need to go 75 bps at the next meeting. Moreover, Powell puts a great deal of weight – way too much, in our view – on gradualism and signaling rather than just focusing on getting monetary policy to where it needs to be to achieve the goal of getting inflation under control.