Fed hit with new pressure to be aggressive after hot US inflation report

Another strong inflation reading for May could push Fed officials to consider a more dramatic rate increase. PHOTO: REUTERS

NEW YORK (BLOOMBERG) - Federal Reserve officials face pressure for more aggressive policy action after a hotter-than-expected US inflation reading for April, which could bring the option of a 75-basis point hike back into the conversation if prices fail to cool.

"This should put talks of 75 basis points back on investors' minds as well as the FOMC table," Mr Roberto Perli, head of global policy research at Piper Sandler & Co, wrote in a note to clients on Wednesday (May 11), referring to the policy-setting Federal Open Market Committee.

"It is too soon to tell what the Fed will do in June... but there is now upside risk relative to the 50 basis points that seemed a foregone conclusion," he said.

The United States central bank hiked interest rates by a half point last week and Fed chair Jerome Powell signalled that similar rate increases are on the table for the next two meetings, while pushing back against making a larger move.

Investors seem to agree that a 75-basis point hike is not likely, according to pricing in federal fund futures markets. But they did increase bets that the Fed will roll out another half-point hike in September - following increases of that size in June and July - after a Labour Department report on Wednesday showed that consumer prices excluding food and energy increased 0.6 per cent from a month earlier and 6.2 per cent year on year.

Atlanta Fed president Raphael Bostic said later on Wednesday at an event hosted by the World Affairs Council of Jacksonville, Florida, that she was "going to be supporting moving more" if price growth continues at the current high pace.

Policymakers will receive more inflation evidence ahead of their next meeting that could help to shape their course of action. Another strong inflation reading for May could push Fed officials to consider a more dramatic rate increase, some analysts say.

Other Fed watchers argued that the central bank is likely to stick to the plan it has laid out for the next few meetings.

Since several officials have already signalled that they think the Fed will need to move interest rates above neutral to get inflation down, the latest numbers may not do much to alter the near-term course of monetary policy.

"It is a high bar to shift away from guidance, but today's outcome most certainly was not what the Fed assumed," said Mr Karim Basta, chief economist for III Capital Management, in an e-mail to clients. Mr Powell's comments "leave the door open to alter the outcome" and the next inflation report will be "highly important", he wrote.

Cleveland Fed president Loretta Mester said on Tuesday that she supported raising rates by a half point at the next couple of meetings and then speeding up, or slowing down, the pace of increases based on what happens with inflation.

"We don't rule out 75 forever, right? The cadence we are going now seems about right to me," Ms Mester said during an interview on Bloomberg Television on Tuesday.

"We are going to have to assess whether inflation is actually moving down, and then we will be able to get more information after we do a couple of those to see," she said, referring to 50-basis point hikes.

Policymakers could raise rates more modestly by 25 basis points in September if future reports show that inflation is beginning to weaken, said Mr Pablo Villanueva, senior US economist for UBS Investment Bank.

"We think the inflation outlook is going to look very different in September than the current situation," said Mr Villanueva, though the risk of a half-point move that month "would increase if inflation remains strong".

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