JPMorgan Predicts 75 Basis-Point Interest Rate Hike

Economists at J.P. Morgan announced Monday that they expect the Federal Reserve to enact a three-quarter point interest rate hike when it meets on Wednesday, a figure that would shatter stock and cryptocurrency markets.

“We now look for a 75bp hike on Wednesday,” the economists wrote in a research note late Monday, adding that they believed a 100 basis-point hike was on the table. “One might wonder whether the true surprise would actually be hiking 100bp, something we think is a non-trivial risk. After this week we look for two more 50bp hikes in July and September before the committee slows to a 25bp hike per-meeting pace until … early next year.”

CPI data released Friday showed inflation rising by 8.6 percent over the preceding 12 months, the most since 1981 and a third of a point higher than economists anticipated. A University of Michigan survey, meanwhile, found just 50.2 percent of consumers had faith in the economy — a record low since the university began conducting the study in 2008. Experts believe the indicator can foreshadow changes in the economy as Americans change their spending habits to reflect fears of a recession.

Before the latest data, the Fed was expected to raise the interest rate by a half-point on Wednesday. It took the same action in early May, precipitating a freefall in markets, including cryptocurrency markets, which saw the price of bitcoin drop from $39,000 to $27,000 several days later. A three-quarter point hike could be the catalyst for much deeper cuts to stock and crypto prices.

The assessment from J.P. Morgan comes after other economists similarly revised their estimates. “We believe … inflation data — both the CPI (consumer price index) and UMich inflation expectations — are game changers that will force the Fed to switch to a higher gear and front-load policy tightening,” Jefferies’ Aneta Markowska told Reuters on Friday.

Economists at Barclays similarly changed their forecast on Friday to predict a three-quarter point hike at the upcoming meeting. “The U.S. central bank now has good reason to surprise markets by hiking more aggressively than expected in June,” the economists, led by Jonathan Millar, wrote in Friday note. “We realize it is a close call and that it could play out in either June or July. But we are changing our forecast to call for a 75 basis-point hike on June 15.”

Grant Thornton chief economist Diane Swonk echoed the sentiment in a Monday interview with The Wall Street Journal. “It’s a one-two punch,” Swonk said. “They’ve got to go now with 75. The Fed is behind the curve, and they know it. The data now is not good. The data is saying they have to do more. We’re moving into a more inflation-prone world, and they know that, and if they don’t derail it now, this could be incredibly corrosive.”

Prices for Fed funds futures contracts reflect a more than 50 percent chance of a three-quarter point hike by July — but just a one-in-four chance of it occurring on Wednesday. The indicator suggests a range of 3.25 to 3.5 percent by the end of the year, totaling more than two points over the next six months with an average monthly increase of .35 percent.

Federal Reserve Chairman Jerome Powell briefly set markets soaring after the Fed’s May meeting after he told reporters “a 75 basis-point increase is not something that the committee is actively considering.” But other Fed officials quickly threw cold water on that comment, including Federal Reserve Bank of Cleveland President Loretta Mester.

“I think 50 and 50 in June and July is perfectly reasonable,” Mester said in an interview with NikkeiAsia later in the month. “We don’t see inflation coming down fast enough. And we’ll want to keep every option on the table, including 75. … I don’t rule out 75 in the future.”

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