Interest rates

The week ahead: The Fed is looking for the right number on interest rates

What is 25 basis points worth? What message does a quarter percentage point rise in short-term interest rates send to investors, businesses and consumers?

It’s a debate that will be on the table when the Federal Reserve’s interest rate-setting committee meets around a large oval conference table in Washington in the coming week.

Is this a sign of an aggressive focus on fighting inflation faster, putting up a brave front despite growing concerns about an economic recession? Or does it signal growing concerns that inflation is spiraling out of control and threatening to burn longer and longer?

The central bank will continue to raise its target short-term interest rate when it announces its decision on Wednesday. Consumer inflation in June was above 9% and US businesses added nearly 400,000 jobs. This data gives the Fed the economic support it needs to continue raising borrowing costs toward its goal of reducing inflation.

And the committee will hike rates by at least three-quarters of a percentage point (75 basis points in Fed parlance). There is no way the group will be less aggressive.

Less than two weeks ago, however, markets were seriously considering a more hawkish rise – a full percentage point. Such a jump would be the largest increase in a single meeting since the 1980s. There was a nearly 50% chance of such a large increase, according to the CME FedWatch Tool.

Since then, several regional Federal Reserve leaders have denounced expectations of a one-percentage-point hike at the July meeting. Still, the odds market took the big leap with odds of 30% from Thursday.

This stronger response will not have a material impact on gasoline or egg prices. Still, it will send an unequivocal message that the Fed will not be deterred in its battle against inflation by fears of recession. But it can also be interpreted as sealing a recessionary fate.

The Fed’s Open Market Committee’s most effective tool for fighting inflation – interest rates – has a limited effect on the main contributors to rising prices – energy and food. The bank’s “open mouth” tool – the way it talks about its efforts and the economy – can be just as effective in shaping consumer and investor inflation expectations.

Tom Hudson

Financial journalist Tom Hudson hosts “The Sunshine Economy” on WLRN-FM in Miami, where he is vice president of news. He is the former co-anchor and editor of “Nightly Business Report” on public television. Follow him on Twitter @HudsonsView.