Policymakers have been raising interest rates aggressively in response to sky-high inflation that has gripped the U.S. economy in 2022. Now, as the Federal Reserve gears up for its July meeting on Tuesday, the market expects that the hawkish policy is set to persist as officials continue down the path of aggressive rate hikes.
Americans are already feeling the sting of sky-high inflation, and rising interest rates mean that the cost of borrowing money is also headed higher.
Sam Bullard, head of the St. Louis Fed, believes the Fed should aim for an interest rate range of 3.75% to 4% by year-end, up from his previous target of 3.5%. Bullard says the Fed needs to be more aggressive in the second half of 2022 vs. the first half to tame inflation.
June’s inflation headline number came in at a rate of 9.1% versus a year ago, rivaling levels from the early 1980s. The Fed has little room for error, having come under fire for failing to prevent inflation from running hot this year.
As a result, some estimates predict policymakers will raise rates by a whopping full percentage point at the Fed’s next two-day meeting beginning on July 26. This would be the most aggressive rate hike officials have implemented in decades; the Fed has not increased interest rates by 100 basis points since the early 1990s.
Nothing appears to be off the table. Raphael Bostic, president of the Atlanta Fed, reportedly said that “everything is in play” with regard to rate changes in July. When asked if this could mean a full-percentage-point rate increase, he said “it would mean everything.”
On the flip side, as policymakers make the media rounds ahead of their next meeting, other estimates appear to be settling on a likely 75 basis point rate hike, the same as the Fed implemented in June.
The Fed’s Christopher Waller, who appears to be in favor of a three-quarter-percentage-point increase, issued a warning on a possible 100 basis point hike, suggesting that overdoing rate increases could do more harm than good in the economy. He reminded Americans that even a 75 basis point increase would be “huge.”
Loretta Mester, president of the Cleveland Fed, said she sees “no reason” to raise rates by anything less than 75 basis points in July based on the latest Consumer Price Index data. The index hit its highest since 1981 last month as fuel and grocery prices soared.
Meanwhile, consumers are charging more of their purchases, with credit card balances rising in Q1 2022 to $841 billion, with annual percentage rates (APRs) averaging around 17% for the quarter. Ted Rossman, a senior industry analyst at CreditCards.com, said APRs could reach as high as 19% by year-end, which would set a fresh record.