The Federal Reserve will make its biggest rate hike in 28 years this week to deal with scorching inflation, a move that should push the U.S. dollar to a new high against its major currency rivals, he said. Jefferies Monday.
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- The Federal Reserve will raise interest rates by 75 basis points this Wednesday, Jefferies said in a note Monday.
- Jefferies changed its call by 50 basis points after the May inflation reading reached a 41-year high of 8.6%.
- The US dollar index hit a new 20-year high above 105 on Monday.
Jefferies predicted that the central bank will raise the federal funds rate by 75 basis points when it concludes its two-day meeting on Wednesday. An increase of this size would be the largest since November 1994, when Alan Greenspan served as president.
“We ourselves and Barclays have increased our Fed rate call to 75 bp from 50 bp at this meeting, as we not only think the Fed should increase, but they will actually increase in that order of magnitude.” , Brad Bechtel, global head of FX at Jefferies, in a note released Monday.
Barclays changed its call to 75 basis points on Friday after the Bureau of Labor Statistics said the consumer price index rose 8.6% during the year to May, in part because fuels increased. Economists surveyed by Bloomberg expected a reading of 8.3% and the press confused some expectations of an inflation peak in April.
There is a “very convincing case of why [the Fed] will go in that order of magnitude considering how far they seem to be slipping behind the curve, how much pressure they are under the administration and the Fed itself in that regard and how the combination of a high CPI and the decline of consumer confidence really paints an ugly picture of how the US economy is shaping up, ”Bechtel said.
Bechtel said a move of 75 basis points would come as a surprise to some who “keep a hard line” on expectations that the Fed, led by President Jerome Powell, will raise the key rate by half a percentage point. The widely observed U.S. dollar index is “likely to reach 105.00” on a Fed-size hike of this magnitude, he said.
But investors on Monday sent the index to a new high of 20 years beyond that level during Monday’s session, up 0.6% to 105.06. The increase suggested that investors are preparing for a potentially more aggressive move than the 50 basis point increase in which they had an overall price.
The central bank has since raised the Fed fund rate by 75 basis points to 0.75% to 1%. The Fed’s rapid rate hike and its change in tone last year indicate that embarking on an aggressive cycle of rising interest rates to cool inflation has contributed to a 9% rise in interest rates. dollar index in 2022.
The dollar index measures the yield of the green dollar against the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona and the Swiss franc.