Investors raised the odds of another super-sized rate hike when Federal Reserve policymakers meet next month after Chairman Jerome Powell on Friday signaled the central bank is likely to continue raising rates and leave them elevated for a while to crush inflation.
Traders are now pricing in a 60% chance of a 75-basis-point increase in the fall, according to the CME Group's FedWatch tool, which tracks trading. Previously, Wall Street was evenly divided over the possibility of a three-quarter percentage point hike, or a slightly smaller half percentage point increase.
"Another 75-basis-point increase in the Fed’s policy rate at its meeting next month is a distinct possibility," said RSM chief economist Joe Brusuelas.
The change came after Powell's keynote speech at the Kansas Federal Reserve's annual economic symposium in Jackson Hole, Wyoming. In his message, Powell reiterated a pledge to "forcefully" fight inflation that is still running near the hottest pace in 40 years and wrestle it closer to the Fed's 2% goal.
"While higher interest rates, slower growth and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses," he said. "These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain."
Even with four consecutive interest rate hikes, including two back-to-back 75-basis-point increases, Powell stressed that the Fed is not in a place to "stop or pause" — an unwelcome sign for investors who were predicting a rate cut next year.
The current benchmark federal funds range of 2.25% to 2.50% is around the "neutral" level, meaning that it neither supports nor restricts economic activity. But the Fed chief signaled that a restrictive stance will almost certainly be necessary as the central bank tries to pump the brakes on the economy.
"We are moving our policy stance purposefully to a level that will be sufficiently restrictive to return inflation to 2%," he said, suggesting that "restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy."
Powell's comments confirmed that the Fed remains determined to fight inflation and slow consumer demand, even if it means failing to achieve the elusive soft landing and triggering a recession.
"In essence, Powell is clearly stating that right now, fighting inflation is more important than supporting growth," said Jeffrey Roach, the chief economist at LPL Financial.
It's unclear what the rate hike trajectory could look like over the next year. Powell said that Fed officials will be watching forthcoming economic data closely in making their decisions.
Although inflation moderated slightly in July — the Fed's preferred gauge to track price growth fell 0.1% on a monthly basis — Powell said that it is not enough to determine that policymakers' tightening mission has been successful.
"While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down," he said.