Fed likely to raise rates by three-quarters, report says

The Federal Reserve is expected to raise interest rates by a quarter-point at its July meeting, according to a report by the Wall Street Journal. It noted that the central bank will likely keep its key rate at a record low for a long time.

Several Fed officials have been saying that a larger rate hike was unlikely. They entered into a quiet period before the meeting on Saturday.

On Thursday, Christopher Waller, a Fed's Board of Governors member, said that a 75-basis-point increase was needed to avoid overdosing on the rate increases. He told a gathering in Idaho that the central bank should not be blamed for not raising rates fast enough.

"You don't want to overdo the rate increases. A 75-basis-point hike, folks, is huge," Waller said. "Don't say, 'Because you're not going 100 [basis points], you're not doing your job.'"

Until last week, it was widely believed that the Fed would raise rates by a quarter-point. However, after the release of the June consumer price index, which showed that inflation accelerated to a 9.1% annual rate, market speculation about a larger-than-expected increase started to rise. The rising prices were caused by various factors, including the conflict in Ukraine and skyrocketing energy costs.

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Waller said the June consumer price index report was ugly, making policymakers want to make policy based on different data points.

Raising rates too dramatically takes toll on the economy

While the Fed has been saying it is committed to containing inflation, Raphael Bostic, a regional bank president of the Atlanta Fed, warned that a rate hike too quickly could cause the economy to contract.

Interest-rate futures contracts spiked on Wednesday, with some suggesting that the central bank would raise rates by a quarter-point. However, the rate-hike probability had dropped by Friday to around 30%.

Esther George, a regional bank president of the Kansas City Fed, warned last week that the sudden change in interest rates could threaten the central bank's ability to deliver on its rate-hike commitments.

"More abrupt changes in interest rates could create strains, either in the economy or financial markets, that would undermine the Fed's ability to deliver on the higher path of rates communicated," George said.

Consumer sentiment hits lowest level

According to a survey released by the University of Michigan last Friday, consumer inflation expectations fell to their lowest level in a year.

Jay Bryson, the chief economist of Wells Fargo, also called for a rate increase after the consumer price index report was released on Wednesday. However, he said Friday that the case for a rate increase had become less compelling.

Since the start of the year, the Fed has increased its key interest rate by a quarter-point each time it met. In June, it raised the rate by an entire percentage point, the largest increase in a single meeting since 1994. If the central bank decides to raise the rate by another half-point in July, it'll be between 2.25% and 2.5%.

According to a survey by the Wall Street Journal, almost half of the economists believe that the country is headed for a recession in the next 12 months. About 46% of the economists think that the Fed will raise interest rates too aggressively, while 12.3% think it will raise too little.

Most economists believe that the Fed will raise the interest rate at its next meeting in December and maintain it at or above 3.25% throughout the next year. They also expect the central bank to start cutting rates by 2023.