The US Federal Reserve is set to hike the world’s most important interest rate by another historic amount to tame sticky inflation, Wall Street warned today.
A hotter than expected inflation reading published today prompted a wave of economists to bet on the Fed lifting US borrowing costs 75 basis points for the third time in a row at their meeting later this month.
Stateside prices are up 8.3 per cent over the year to August, down slightly from July’s 8.5 per cent rate, but much higher than analysts’ expectations.
Wall Street tanked on the news. The tech-heavy Nasdaq shed nearly four per cent, while the S&P 500 and Dow Jones fell 3.03 per cent and 2.61 per cent respectively.
Fed chair Jerome Powell and the rest of the rate setting committee have been heaping pressure on business and households by making borrowing more expensive in a bid to quash spending and cool prices.
Since March, the central bank has raised rates 225 basis points, the quickest tightening cycle since former Fed chief Paul Volcker led the charge against elevated inflation in the 1980s.
That drive has bumped rates to between 2.25 per cent and 2.5 per cent. Markets are now fully pricing in a three quarter of a percentage point jump.
The monthly inflation gauge has topped economists’ attention in recent months due to it providing a more accurate measure on whether high prices are embedding in the US economy.
That hit 0.1 per cent in August. Core monthly inflation was also punchier than forecast at 0.6 per cent.
The likelihood of the Fed launching a historic full percentage point rise at the next federal open market committee meeting on 21 September has strengthened after today’s numbers, analysts said.
“There might be some late speculation that the Fed could even go for a 100 basis point hike,” Paul Ashworth, chief US economist at consultancy Capital Economics, said.
He added he thinks that is unlikely. The firm’s base case is a 75 basis point rise.
Wall Street had been gearing up for inflation to drop to eight per cent, driven lower by tumbling petrol prices.
However, outsized rent increases kept inflation above expectations.