It Might be Inevitable for Rates to Rise By 75 Basis Points in July

On Friday (July 1st) Eastern Time, San Francisco Fed President Daly said that U.S. inflation is too high and supports a 75 basis point interest rate hike in July.

It is worth mentioning that Daly has been a dovish Fed official. She has previously emphasized that raising interest rates too quickly could damage the economy. As recently as May of this year, Daly said that raising interest rates by 75 basis points was not her main consideration.

However, Daly's attitude has changed under the continued soaring of US inflation. This could signal a slightly higher chance of a 75 basis point hike in the July Fed rate decision.

According to the forecast of the Chicago Mercantile Exchange, the market currently believes that the possibility of the Fed raising interest rates by 75 basis points in July has been as high as more than 80%.

Dovish officials also turned to support for a 75bps rate hike.

Daly said her monetary policy stance is that the Fed needs to reach a neutral federal funds rate range of around 3.1% by the end of the year.

"I think there will be a 75 basis point hike in July, and then we can figure out what else needs to be done to get to the 3.1 percent range by the end of the year." But she also mentioned that after reaching that target, " In terms of magnitude, the pace of rate hikes will likely slow down naturally."

Although Federal Reserve Chairman Powell emphasized in the June resolution that raising interest rates by 75 basis points would not be the norm, several Fed officials have recently spoken out in favor of raising interest rates by 75 basis points.

On Thursday, June 23, Fed Governor Michelle Bowman stated that she supports the Fed by raising interest rates by 75 basis points in July and then raising interest rates several times by 50 basis points.

On June 22, Chicago Fed President Charles Evans also said that it would be "very reasonable" to raise interest rates by 75 basis points in July.

Inflation is expected to be difficult to cool down in the short term.

In addition, Daly also highlighted concerns about the inflation outlook in his speech: "Inflation data is generally in line with expectations." I expect that the next few releases are also expected to be high... So if we're going to do our part to restore price stability, we must stick to our policy line. "

So, what would make this unnecessary? If there is some unexpected development in the economy that can pull inflation down quickly, or supply chains can be repaired quickly, or if there is another time we have to deal with global shocks ... but none of that happened, "she said.

Regarding the US economic situation, although Wall Street is generally worried about the risk of recession, Daly's statement is more optimistic.

Although many large technology companies, including Meta and Tesla, have recently been laying off employees or scaling back their hiring plans, Daly believes: "The (U.S.) real economy seems to have two aspects: there will be layoffs, and there will definitely be layoffs, but these people can quickly find other jobs."

As for the U.S. housing market, which has turned cold recently, Daly also believes: "From a budget perspective, the situation of households is very good, which means that the systemic risk posed by the slowdown in the housing market does not exist."