[US Inflation Shock] Will Fed Take Drastic Measures? ... "1.0%P Hike" Speculated

[Asia Economy New York=Special Correspondent Joselgina] The Federal Reserve's (Fed) high-intensity tightening measures have become inevitable due to the persistent inflation in the United States that shows no signs of easing. The sudden emergence of the '1.0 percentage point hike' option on the 13th (local time), which had not been mentioned in the market until now, reflects the recognition that a more aggressive interest rate hike path is necessary to prevent entrenched high inflation. The immediate focus is on the size of the rate hikes in the remaining three meetings this year. Possibilities include a 1.0 percentage point hike, the first in about 40 years, as well as four consecutive 0.75 percentage point hikes through November.

◇Entrenched Inflation... Concerns of Widespread Spread

On this day, the so-called 'inflation shock' spread across global financial markets, including the New York stock market. This was because the August Consumer Price Index (CPI) report released by the U.S. Department of Labor before the market opened confirmed not the peak of inflation but rather concerns about 'widespread high prices.'

The August CPI increase rate was 8.3% year-on-year, down from 9.1% in June and 8.5% in July, but it far exceeded the market expectation of 8.0%. It also rose 0.1% month-on-month. The initial market forecast that prices would peak and turn negative, supported by double-digit drops in gasoline prices, was thus broken.

What further heightened market concerns was the core CPI. The core CPI, which excludes volatile energy and food prices, rose 6.3% year-on-year. This figure exceeded both the previous month and market expectations. In particular, the month-on-month increase was 0.6%, double that of July's 0.3%. Most items, including food, used cars, new cars, clothing, medical services, transportation, and housing costs, which had been declining, also rose.

This is why Larry Summers, a Harvard professor and former U.S. Treasury Secretary, pointed out that "this CPI confirms the seriousness of the inflation problem in the U.S." Professor Summers specifically mentioned the 'median CPI' increase, which can confirm the median inflation rate by excluding volatile items, calling it the "highest ever."

Ultimately, the report confirmed that the Fed's expected path?that if food and energy prices stabilize, overall economic price pressures would ease?is not materializing. Ryan Sweet of Moody's Analytics expressed concern about the possibility of entrenched high inflation, saying, "High inflationary pressures are being confirmed across the economy."

◇No ‘Fed Pivot’... 1% Point Hike Speculation

The Fed, which has been driving tightening since the beginning of the year, is increasingly likely to take more drastic and extraordinary measures. Fed officials, including Chairman Jerome Powell, have recently emphasized their determination to curb inflation at every official occasion.

The market's immediate attention is focused on the September Federal Open Market Committee (FOMC) regular meeting scheduled for the 20th-21st. Beyond three consecutive giant steps (0.75 percentage point rate hikes), the 1.0 percentage point hike option has also begun to be discussed. Local media reported that if the Fed raises rates by 1.0 percentage point, it would be the first time in about 40 years.

Looking at the Chicago Mercantile Exchange (CME) FedWatch, while the 0.75 percentage point hike in September is favored, the probability of a 1.0 percentage point hike surged from 0% the previous day to 33% on this day.

Supportive comments for a 1 percentage point rate hike have also poured in from major institutions and experts, including Nomura. Former Treasury Secretary Summers tweeted that "moving quickly is better," adding, "If I had to choose between a 1.0 percentage point and a 0.5 percentage point hike in September, I would choose the 1.0 percentage point hike to strengthen market confidence." Diane Swonk, Chief Economist at KPMG, described the CPI report as "a nightmare" and said, "The 1% point hike option is now on the table."

High-intensity tightening to curb inflation is expected to continue in November as well. The interest rate futures market reflected more than a 50% chance of consecutive 0.75 percentage point hikes in September and November. The federal funds rate by the end of this year is estimated to be 4.00-4.25%. The current U.S. target federal funds rate is 2.25-2.50%.

This content was produced with the assistance of AI translation services.