The Week Ahead: Fed looking for the right number on interest rates

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

This is a debate that will be on the table when the Federal Reserve’s interest rate setting committee meets around a big oval conference table in Washington in the week ahead.

Is it a sign of aggressive focus on fighting inflation faster, putting up a brave front despite gathering worries about an economic recession? Or does it signal growing worries that inflation is becoming untethered and threatening to burn hotter and longer?

The central bank will continue raising its target short-term interest rate when it announces its decision on Wednesday. Consumer inflation in June was over 9% and American companies added almost 400,000 jobs. These data give the Fed the economic backing to keep raising borrowing costs toward its goal of bringing down inflation.

And the committee will raise rates by at least three-quarters of a percentage point (75 basis points in Fed-speak). There are zero odds the group will be less aggressive.

Less than two weeks ago, however, markets seriously considered a more hawkish hike — a full percentage point. Such a jump would be the biggest increase in a single meeting since the 1980s. There was almost a 50 percent chance of such a significant increase, according to the CME FedWatch Tool.

Since then, several regional Federal Reserve leaders have talked down expectations of a one percentage point increase during the July meeting. Still, the probability market pegged the big jump with 30% odds as of Thursday.

That stronger response will not materially impact the prices of gas or eggs. Yet it will send an unmistakable message that the Fed won’t be deterred in its inflation battle by recessionary worries. But it also may be interpreted as sealing a recessionary fate.

The Fed’s Open Market Committee’s sharpest tool to fight inflation — interest rates — has limited effect on the big contributors to higher prices — energy and food. The bank’s “open mouth” tool — how it talks about its efforts and the economy — can be just as effective shaping inflation expectations of consumers and investors.

Tom Hudson

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