Faced with a slowing economy and inflation that is at least showing signs of topping out if not retreating, the Federal Reserve next week is likely to raise interest rates by three-quarters of a percentage point. For a brief period last week, markets were buzzing with the idea of the central bank making a move purely in percentage points. But economists at Goldman Sachs and others on Wall Street now expect the Federal Open Market Committee to deliver lower rates, which would still match the biggest move since 1994. “The reduction in inflation expectations is one reason why we expect the FOMC Goldman economist Ronnie Walker said in a client note on Sunday. If the Fed goes that route, it will drive interest rates. its benchmark overnight lending rate to the target range of 2.25%-2.5%, the last level being by the end of 2018. Many central bank officials in recent days said they would feel comfortable on the upside 0.75 percentage points at their meeting next week, however, they also left the door open to move forward, according to CME Group data, as of Monday morning, the markets are trading pricing at 2-to-1 odds that the increase will be three-quarters of a percentage point, or 75 basis points, according to CME Group data.Walker said one of the Fed’s key inputs will be survey The University of Michigan’s consumer sentiment on Friday, showed 5- to 10-year expectations fell to 2.8%, down 0.3 percentage points. The June Michigan survey showed the Fed managed to go from a half-point gain to three-quarters of a point after inflation expectations rose. Goldman expects that falling gasoline prices have helped fuel the decline. “The decline in both household and market measures has reflected a combination of lower gasoline prices – which markets expect to fall further in the near-term, but leading strategists Our economy is expected to bounce back – and accelerating monetary policy tightening has also led to Walker writing.Michigan data came out the same day as a report showing June retail sales better than expected. Although inflation remains lower, Fed Governor Christopher Waller said on Thursday he will be closely watching retail sales data, along with housing numbers this week, to decide whether to raise 75 or higher. 100 basis points or not The report provided ammunition in both directions Waller said he would look to soften demand in response to Fed tightening, and retail sales report shows the opposite – that consumers are resilient despite higher interest rates Some on Wall Street still think the Fed could choose to raise a whole percentage point, economist Aichi Amemiya of “A flurry of data comes…showing that inflation has become more entrenched than the Fed expects and demand remains too strong to outstrip supply,” Nomura wrote. “As a result, we are maintaining our expectation that the Fed will raise rates by another 100bp in July, up from a 75bp increase in June.” Indeed, there are many data points that suggest that inflationary pressures remain persistent. The Atlanta Fed has a dashboard that tracks multiple metrics, each showing high inflation and the possibility of a wage price spiral, in which both worker wages and prices eat out. The central bank’s measure of the “fixed price” consumer price index follows goods whose costs do not change frequently. That measure jumped to a record 8.1 percent in June according to data from 2012 and is a sign that inflation is both persistent and expanding. With that, the Atlanta Fed measures wage growth. Its tracker rose 6.7% in June, also a record for a data set dating back to 1997. Conflicting dynamics make for a difficult policy choice. Markets are particularly sensitive to various Fed changes, and confusion surrounding the June 11-11 transition to 75 basis points has prompted criticism that the central bank policy is being drafted immediately. Krishna Guha, head of global policy and central banking strategy for Evercore ISI. “So if the Fed makes a 100bp move then it’s important that they readjust the game plan to what happens after that. The strategy – or lack of strategy – coming out of July is key. for the macro outlook and risk assets.” There’s also a school of thought that doesn’t matter so much to individual moves but to what the Fed has in mind for its endgame. The inverse between 2-year and 10-year Treasuries now suggests the bond market is pricing in a downturn. The two-year bond currently at 3.17% also suggests the Fed may not be as aggressive as the market thinks. Futures prices are pointing to a terminal lending rate of 3.55% in early 2023. “Whether the FOMC raises rates 75 or 100 basis points a week from Wednesday is much less important to stock prices versus markets believing the Fed will stop Nicholas Colas, co-founder of DataTrek Research, from writing. “The good news here is that, for the first time since 2020, markets think the path forward The Fed’s opinion is too aggressive. This could leave room for Chairman Powell and the FOMC to begin guidance on reducing long-term interest rate expectations if inflation begins to ease. quickly.”