Nomura now thinks the Fed will hike rates by 75 basis points in June and July, in one of the fastest tightening cycles ever

April 22, 2022

Nomura now thinks the Fed will hike rates by 75 basis points in June and July, in one of the fastest tightening cycles ever

Jerome Powell, Chair of the US Federal Reserve, at IMF meetings in 2018 — Fed Chair Jerome Powell said Thursday that he would like to move faster with rate hikes.
ANDREW CABALLERO-REYNOLDS/Getty Images

Nomura now expects the Fed to hike interest rates by 75 basis points in both June and July, after a 50 point increase in May.
That would be one of the fastest tightening cycles in history, as the Fed grapples with red-hot inflation.
Fed officials, including Chair Jerome Powell, have heavily suggested that they want to move faster in raising interest rates.

The Federal Reserve will hike interest rates by 75 basis points in both June and July, investment bank Nomura has predicted, in what would amount to one of the fastest monetary policy tightening cycles ever.

The Japanese bank's US economists, including Aichi Amemiya, said in a note late Thursday the Fed will raise rates by 50 basis points in May, and then follow up with two bigger hikes at its June and July meetings.

The US central bank raised interest rates by 25 basis points, or 0.25 percentage points, in March. That took the target federal funds rate to between 0.25% and 0.5%.

Since then, Fed officials have heavily suggested they're likely to start raising rates more quickly, as they try to tame the strongest inflation in 40 years.

Amemiya and colleagues highlighted the fact that St. Louis Fed President James Bullard said he could not rule out an increase of 75 basis points. In an interview earlier this week, Bullard said there was precedent for such a move, which last happened in 1994.

"We believe comments from FOMC participants this week were an intentional effort to 'trial balloon' a 75 basis point hike, and then closely monitor the market's response," Nomura said. The FOMC is the Federal Open Market Committee, the Fed's group of rate-setters.

The central bank typically only raises interest rates by 25 basis points at a time. It has not carried out back-to-back rate increases at consecutive meetings since 2006, and it has not raised rates by 50 basis points since 2000. Its next two-day meeting begins May 3.

Nomura said it thinks the Fed will push interest rates well above the so-called neutral rate — reckoned by many economists to be around 2.5% — which is the level thought to neither stimulate nor slow the economy.

It expects the Fed to push the target rate to a peak of between 3.75% and 4% by May 2023. However, Nomura also expects the central bank to have to cut rates in early 2024 as the economy slows.

Fed Chair Jerome Powell said Wednesday that he would like to increase rates faster to tackle inflation. US consumer price index inflation in Marc climbed to 8.5% year-on-year, the highest rate since 1981.

"Fifty basis points will be on the table for the May meeting," Powell told a meeting hosted by the International Monetary Fund Thursday.

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