Federal Reserve Chair Jerome Powell indicated strongly last week that the Fed will likely raise interest rates by 50 basis points at its next meeting on May 3-4. It will likely get more aggressive in its fight against 8%-plus inflation. It’s going to have to because just as fast as the Fed is trying to bail water out of the boat, the White House and Congress are determined to keep pouring it in.

“It is appropriate in my view to be moving a little more quickly” to raise rates than the Fed has recently, Powell said last Thursday at an International Monetary Fund event. “Fifty basis points will be on the table for the May meeting,” he said. That would double the 25-basis point increase at its March meeting, which now looks relatively puny compared to the yield on the 10-year Treasury, which is rapidly approaching a three-handle for the first time since 2018.

St. Louis Fed president James Bullard, suddenly the most hawkish voting member on the Fed’s monetary policy committee, said he thinks a 75-basis point hike is more appropriate. However, he conceded that “more than 50 basis points is not my base case at this point.” Still, 50 bps is a lot better than 25 bps in bringing the Fed’s target closer to the so-called neutral rate, which is when Fed policy is neither accommodative nor restrictive, and the Fed is nowhere near that (although no one really knows what the magic number is). With six more meetings to go this year, including May’s, 50 bps at each meeting would push the fed funds rate above 3%.

That seems awfully aggressive, given the Powell Fed’s generally dovish inclinations. Still, it may have no choice given that Continue reading "Let's Get Serious" →