JPMorgan Plays Down Odds of Full-Point Fed Rate Hike

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(Bloomberg) -- Federal Reserve officials are unlikely to raise interest rates by a super-sized 100 basis points when they meet next week, according to JPMorgan Chase & Co. (NYSE:JPM) chief US economist Michael Feroli.

“We think the odds of a 100 basis-point move -- though certainly not zero -- are lower than a third,” he wrote in an note to clients Wednesday. “Good drivers don’t increase their speed as they get closer to their destination.”

Investors fully expect a 75 basis-point increase when Fed officials gather Sept. 20-21 and see a roughly one-in-three chance they will opt for the bigger move, according to pricing in federal fund futures contracts. That’s after core US consumer inflation came in at a much-hotter-than-forecast 0.6% in August compared with the prior month.

Feroli said that up-shifting to 100 basis points would imply an even-higher peak for the Fed’s benchmark rate above 5%, “which we doubt.” He also warned that stamping even harder on the monetary policy brakes now could in turn harden bets that this be followed by Fed rate cuts in 2023. That would make the Fed’s job on price pressures even harder by easing financial conditions.

“A 100 basis-point move next week may only encourage those who see easing next year following a Fed accelerating hikes in late ‘22,” he said. 

Investors, speculating that the Fed will tip the economy into recession next year in the fight to curb inflation, already see policy makers easing rates in the later stages of 2023.

©2022 Bloomberg L.P.