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The Fed: A ‘firestorm’ of hawkish Fed speculation erupts following strong U.S. inflation reading

How hawkish will the Federal Reserve be this year?

At the moment, Wall Street economists seem to be telling their clients “more hawkish than we thought five minutes ago.”

The strong U.S. consumer inflation data reported Thursday has set off what looks like a chain reaction of upward revisions to where the Fed is headed.

Fed watchers are talking seriously about an interest rate hike before the Fed’s next formal meeting on March 16.

The consumer price index rose 0.6% in January, with broad based gains. The year-over-year rate rose to 7.5%, the highest level in 40 years.

In the wake of the data, Goldman Sachs said it now sees seven consecutive 25 basis point rate hikes at each of the remaining Fed policy meeting this year. The investment bank’s earlier prediction was five hikes.

Economists at Citi said that their base case is a now for a 50 basis point hike in March followed by quarter point hikes in May, June, September and December.

Marc Cabana, head of U.S. rates strategy at BofA Securities, told Bloomberg Radio that it is very likely the Fed is going to raise rates by 50 basis points in March and “who knows maybe even 50 in May.”

The talk about an inter-meeting rate hike before March 16 erupted late Thursday after St. Louis Fed President James Bullard said was open to having that discussion.

It is a strange time for the Fed. The central bank has been slowly “tapering” or reducing the amount of securities is is buying under its quantitative easing program started in the depth of the pandemic. The buying of Treasurys and mortgage backed securities is scheduled to end in mid-March.

Some Fed watchers think the Fed may decide to end these purchases “cold turkey,” with the announcement coming Friday.

Under the Fed’s QE program, the Fed is scheduled to release its schedule for the last month of asset purchases.

“If the Fed releases that calendar at 3 p.m, it is pretty strong forward guidance they’re not going to do an intermeeting hike,” Cabana said.

Cabana said he didn’t expect a rate hike before the March 16 meeting. He suggested that investors who want to bet on an intermeeting hike would be better positioned to play for a 75 basis point hike in March.

U.S. stocks
DJIA,
-1.47%

SPX,
-1.81%

were set to open slightly higher after a wild week on Wall Street. The yield on the 10-year Treasury note
TMUBMUSD10Y,
2.004%

rose above 2%, the highest level since 2019.

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