Economists at JP Morgan and Goldman Sachs said in client notes Monday that they now expect the Federal Reserve to raise its policy rate by 75 basis points on Wednesday.
JP Morgan JPM, -2.98% economist Michael Feroli pointed to the “startling rise in longer-term inflation expectations” in a Friday consumer sentiment report and a Wall Street Journal article on Monday suggesting that Fed officials wouldn’t be “constrained by their previous guidance” of a 50-basis-point increase as reasons for his revised forecast.
Of the WSJ article, Feroli also said “one might wonder whether the true surprise would actually be hiking 100bp, something we think is a non-trivial risk,” in a Monday client note.
A 100-basis-point hike would increase the fed-funds rate by 1% from its current 0.75% to 1% target range.
“Our best guess,” Goldman GS, -1.29% economists wrote, is “the article is a hint from the Fed leadership that a 75bp rate hike is coming at the June FOMC meeting on Wednesday,” in a Monday client note.
Market participants largely had been expecting a 50-basis-point hike by the Fed this week. Since Friday’s inflation reading, however, stocks have tumbled, landing the S&P 500 index SPX, -3.88% in a bear market on Monday.
Read: The S&P 500 just confirmed a bear market: What investors need to know
Turmoil also took the 10-year Treasury TMUBMUSD10Y, 3.363% up to 3.371% on Monday, its highest since April 2011, according to Dow Jones Market Data. Bond prices and yields move in opposite directions.
“The Fed has to rein in demand by reducing excess liquidity,” said Robert Pavlik, senior portfolio manager at Dakota Wealth Management, by phone. While he noted the central bank can’t control supply imbalances, it can control demand by raising rates, which makes it more expensive for households to spend on credit.
“That’s where my argument for a 1% rate hike this week comes in,” Pavlik said. “Just rip the Band-Aid off and do it.”
Krishna Guha, a strategist at Evercore ISI, said the WSJ report “de facto tees up a 75 [basis point hike] this week,” but also that it isn’t “what we think is optimal policy,” nor “good for markets.”
JP Morgan’s Feroli now sees the terminal fed-funds rate in a range of 3.25% to 3.50% by early next year, whereas Goldman economists expect to see that range by the end of December.
Barclays economists on Friday were quicker to call for a 75-basis-point rate hike, saying that an aggressive move in June would provide the Fed its “biggest bang for its buck.”