Get ready for steady Federal Reserve interest rate hikes.
That’s the view from markets in light of the stronger-than-expected consumer inflation data for January, said Subadra Rajappa, head of U.S. rates strategy at Societe Generale.
“The markets are pretty much fully priced in for rate hikes into September,” Rajappa said, in an interview with MarketWatch.
Read: U.S. inflation rate climbs to 7.5% after another sharp increase in consumer prices
Markets are also raising the chances of a 50 basis point rate hike in either March or May, Rajappa said.
In the last two weeks, Fed officials have tried to play down market expectations of a half percentage point move. They have made clear that they want to raise rates by a quarter-point at that meeting.
On Wednesday, Cleveland Fed President Loretta Mester laid out a game plan where the Fed starts with quarter-point rate hikes, with more aggressive moves on the table in the second half of the year if the high inflation reading persist.
Rajappa said she thought rate hikes at every meeting was a better strategy than a half-a-percentage point move.
Historical experience shows that when the market has priced in a 70% or 80% chance of a rate hike, “you tend to see the Fed actually does deliver the rate hike,” Rajappa said.
Neil Dutta, chief economist at Renaissance Macro Research, said if the Fed only raised its policy rate by a quarter-point on March 16, it would be a “dovish suprise.”
“The Fed might not want to go 50, but they probably should,” Dutta said, in a note to clients.
Sal Guatieri, senior economist at BMO Capital Markets in Toronto said: “While this report, on its own, might not trigger a 50-bps inaugural rate hike from the Fed, the pressure will continue to mount if inflation doesn’t begin to rollover this spring as policymakers anticipate.”
Steve Stanley, chief economist, Amherst Pierpont Securities, said he remained confident the Fed will want to limit the first rate hike to 25 basis points.
“Beyond March, I am not digging in my heels about much of anything,” Stanley said.
The debate isn’t academic or inside baseball.
“From a broad perspective, if the Fed were to do a 50 basis point rate hike, the signal would be that they needed to jolt markets to essentially have them reprice the Fed tightening trajectory and you needed to jolt the economy because inflation is much more persistent than you believe and you needed a shock to have a dampening effect on the economy,” said Gregory Daco, chief economist at EY Parthenon.
“I don’t think Powell is of the opinion that that is required, so that’s why I’m thinking that the core of the Fed will not push in favor of a sudden jolt to the economy,” he said.
There will be more data for the Fed to consider prior to its March 16 meeting, with another consumer price index report due before then.
Economists note that Fed raising rates isn’t a panacea.
“Fed rate hikes won’t do anything to improve supply chains, but higher rates ought to slow demand and bat inflation expectations down,” said Scott Brown, chief economist at Raymond James Financial, in a note to clients.
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