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U.S. inflation is still likely to come down “in coming months” but the Federal Reserve has “zero patience” and will continue to hike its benchmark interest rate by 0.75 percentage points in July and September, said Tom Porcelli, chief U.S. economist at RBC Capital Markets.
“A 75 basis point hike is teed up for July and there’s a potential for a full 100bp move although the Fed doesn’t necessarily want to do that,” Porcelli said.
The market is starting to price in another 0.75 percentage point move in September, he noted.
U.S. consumer inflation climbed to a 41-year high of 9.1% in June, as gasoline prices surged.
Porcelli said that inflation will begin to cool but it will take some time.
“It is too early for inflation to really start the process of slowing in earnest,” Porcelli said.
For instance, firms are struggling with high inventories are eventually going to start discounting their products, he said.
Since March, the Fed has pushed up its benchmark policy rate to a range of 1.5% to 1.75% after keeping rates at ultra-low levels close to zero during the pandemic.
Traders are expecting a 0.75 percentage point rate hike at the Fed’s meeting in two weeks, but they are also pricing in a more than 40% chance of a full percentage point move.
Experts don’t know how high the Fed will have to push up its benchmark rate to start to bring inflation down.
Michael Gapen, U.S. economist at Bank of America Securities, said he expects a peak Fed funds rate in a range of 4%-4.25% by next May, with the Fed expected to hike by 175bp over the next four meetings.
The yield on the 10-year Treasury note
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moved above 3% after the CPI data was released.
