By Ven Ram, Bloomberg markets live commentator and reporter
Will the Fed serve up a surprise out-of-policy rate hike?
Well, there is certainly a case for the monetary authority to do so. The ebullient jobs-market data for July, coming after those dire-sounding second-quarter gross domestic product numbers, has opened up a window of opportunity for the Fed to act. After being late to start hiking rates, the Fed — to its credit — has shown remarkable alacrity to quell inflation and has shown the way for lesser central banks that have behaved like deer caught in headlights by pressing on with more emphatic rate increases.
Even so, the Fed’s upper end of the policy rate at 2.50%, which may mark the neutral rate under equilibrium — read “ideal” — conditions, is yet to approach that zip code. And the Fed would do well not to leave that task of getting to 3% to a later day when who knows how the economy will fare. Given the current resilience in the economy, the Fed should seize the opportunity with both hands and announce an out-of-policy rate hike, because Sept. 21 — the next scheduled review — is just too far away. If upcoming data still shows the same resilience, the Fed could then hike by another 50 basis points and hope to end the year around 4%. Fed St. Louis President James Bullard has, on several occasions, outlined the need to front-load as much of the tightening to this year, and in the current inflationary environment and the economy still holding its poise, that makes sense.
A lot may depend on how Wednesday’s consumer-price inflation shape up. While conviction among economists seems to be running pretty high that the on-month reading won’t exceed 0.4% (compared with a median of 0.2%), a higher-than-forecast reading would be enough indication that we still don’t know how Conundrum Inflation will evolve in the months to come. Such an outcome should embolden the Fed to act now.
Doing so would also send a loud message to the markets — which have glossed over recent strength in the economy — that the Fed means business on inflation and thereby tighten financial conditions. Clearly, the Fed needs to act without delay. Now isn’t the time to be standing in the middle of the road.