Fed likely to hike by 100 bps in September -Nomura

© Reuters. U.S. Dollar banknotes are seen in this illustration taken July 17, 2022. REUTERS/Dado Ruvic/Illustration

(Reuters) - The Federal Open Market Committee, the Federal Reserve's policy-setting committee, is likely to raise its short-term interest rate target by a full percentage point at its policy meeting next week, because of the emergence of upside inflation risks, Nomura analysts said on Tuesday.

In a research note published following a hotter-than-expected U.S. August Consumer Price Index report, the investment bank also said it was raising its forecast for the terminal rate by 50 basis points to 4.50%-4.75% by February 2023.

The Federal Reserve will release its policy decision at the close of its two-day meeting next week, on Sept. 20-21.

The consumer price index unexpectedly climbed 0.1% last month from July, and gained 8.3% in the 12 months through August, the Labor Department reported on Tuesday.

Economists had expected a small monthly decline amid falling energy prices, paving the way for the U.S. central bank to perhaps slow the pace of its rate hikes in coming months. But the report showed accelerating inflation in services and a particularly worrisome rise in the cost of rent, which tends to be sticky from one month to the next.

"For some time, we have highlighted an emergence of a wage-price spiral and increasingly unanchored inflation expectations as factors that could keep inflation persistently elevated for longer, requiring a more forceful response from the Fed, Nomura wrote. "With the latest data, we believe those risks are starting to materialize via higher measured inflation across a broad range of goods and services." While pricing by money market traders heavily leans toward another 75-basis-point rate hike next week [FEDWATCH], there is a one-in-five chance that the Fed will raise rates by a full percentage point, up from zero a day before the CPI report.

The market sees the policy rate reaching the 4.00%-4.25% range by the end of this year, and 4.25%-4.5% by March.

Nomura predicted that the U.S. central bank would raise its fed funds target rate by 50 basis points at both the November and December meetings. The fed funds target is currently 2.25%-2.50%, following the Fed's 75-basis-point hike in July.