The U.S. Federal Reserve will opt for another 75 basis point rate hike rather than a larger move at its meeting next week to quell stubbornly-high inflation; as the likelihood of a recession over the next year rises to 40%.
Inflation hit 9.1% in June, another four-decade high, stoking expectations the Fed, having only just shifted gears from 50 to 75 basis points at the last meeting; would act even more forcefully and go for a 100 basis point hike. But some of the more hawkish Fed officials in public remarks have favored a 75 basis point hike; tempering those expectations in recent days. Last month’s 75 bps hike was the first of that size since 1994.
But what is already the most aggressive rate hike path in decades brings with it heightened recession worries. Median predictions from the latest poll showed a 40% probability of a U.S. recession over the coming year; with a 50% chance of one happening within two years. That was a significant upgrade from 25% and 40% in a June poll.
There seems to be an inflation tax on the consumer and that continues to build up; and take its toll and eventually pushes the economy into a mild recession,” said Aditya Bhave, senior U.S. economist at Bank of America Securities. Meanwhile, a slowdown in growth; and hopefully with it, inflation, was likely to force the Fed to cut back on the size of rate hikes at future meetings, the poll found.