Why the Fed Should Raise Rates by Half a Percent
The central bank can maintain flexibility and regain some credibility with a larger-than-expected increase next week.
Still walking in a dark room.
Photographer: Al Drago/Bloomberg
Having oscillated between anticipating another 50-basis-point interest-rate increase by the Federal Reserve next week or a downshift to 25 basis points, traders have settled solidly on the latter, guided both by Fed officials’ comments and by media reports. Some economic and market indicators support such a policy action, but it’s far from uniform. Indeed, my broader analysis of economic and financial conditions would favor the Fed raising rates by 50 points, also on account of risk management, credibility and the persistent misalignment between market pricing and the central bank’s forward policy guidance for 2023.
Through the details of the Fed’s December policy meeting and numerous speeches since, policymakers have guided the markets to expect the central bank to increase rates by 25 basis points, establish a peak rate of just more than 5% for this hiking cycle and keep it there for the rest of 2023. Despite what has been an unusually uniform and consistent message from Fed officials, the markets continue to refuse to fully price in this policy guidance. Instead, traders expect the Fed to cut rates in the second half of the year and are backing that up with their bets.