A series of Wall Street banks lifted expectations this week for the Federal Reserve's next move.
Economists at Bank of America, Goldman Sachs, and Nomura now project policymakers will deliver a 75 basis-point rate increase at their policy-setting meeting Sept. 20-21, up from previous forecasts of a half percentage-point hike.
Following remarks by Fed Chair Jerome Powell at the Cato Institute’s 40th Annual Monetary Conference on Thursday, markets were pricing in about 71 basis points worth of rate hikes in September, based on federal funds futures, or above a 90% chance of a 75 basis point rate hike, Bank of America noted.
“In our view, unchanged guidance about when the pace of rate hikes may slow suggests that Chair Powell and the Fed are comfortable with current market pricing,” Bank of America's chief U.S. economist Michael Gapen said in a note to clients.
“We strongly believe that history suggests that the Fed is willing to surprise financial markets when it comes to policy rate cuts but not when it comes to rate hikes.”
The case for a 75 basis point rate hike began cascading through Wall Street on Wednesday, after a report from the Wall Street Journal suggested the Fed would likely raise rates by this amount at its next policy meeting.
In addition to comments from Fed Chair Powell this week, Fed officials ranging from Vice Chair Lael Brainard to Fed Governor Christopher Waller and St. Louis Fed President James Bullard suggested the central bank will likely keep up its recent pace of interest rate increases.
At both its June and July policy meetings, the Fed raised interest rates by 0.75%, a move that matches its largest since 1994.
Bank of America tacked on expectations for a 25 basis-point rate hike at the Fed's January policy-setting meeting and subsequently raised the terminal target range for the Fed Funds rate by 50 basis points.
BofA's updated estimates call for a 75 basis-point hike in September, a 50 basis-point rate increase in November, and bumps of 25 basis points each in December and January, bringing the terminal target range for the federal funds rate to 4-4.25%.
Goldman Sachs boosted its forecast for Fed's next move in a note this week, with the firm now expecting a 75 basis point rate hike this month and a 50 basis point increase in November; previously, Goldman had expected increases over these meetings of 50 and 25 basis points, respectively.
"Fed officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation has not been as uniform or as rapid as they would like," Goldman analysts led by economist Jan Hatzius said in a note late Wednesday.
Nomura also sees heftier hikes ahead, raising its call to 75 basis points this month and a half-percentage point in November, reflecting an increase of 25 basis points for each of their previous projections.
“Comments from FOMC participants over recent weeks suggest a greater urgency to raise rates somewhat more rapidly and to a higher overall level in order to more forcefully address persistently above-target inflation,” economists at Nomura led by Aichi Amemiya said.
Expectations for higher rates come as data suggests the services sector continues to grow and the labor market remains strong — both indicators to Fed officials the economy can handle more aggressive monetary tightening.
Initial jobless claims fell to 222,000 in the week ended Sept. 3, the lowest reading since May, and the Labor Department's monthly employment report showed a payroll gain of 315,000 jobs in August.
Meanwhile, the services industry picked up for a second straight month in August, with the Institute for Supply Management's non-manufacturing PMI rising to a reading of 56.9 last month from 56.7 in July.
Investors are also looking ahead to the release of next week's all-important Consumer Price Index for August, which is expected to show another moderation in annual inflation.
Economists surveyed by Bloomberg expect prices rose 8.1% over last month, down from 8.5% in July. The reading could alter expectations on whether the Fed opts for a 50- or 75-basis point hike, though a media blackout period for the Fed ahead of this month's FOMC meeting could make communicating altered expectations a challenge for the Fed.
In an interview with Yahoo Finance Live on Friday, Morgan Stanley chief economist Seth Carpenter said there is a "one-way risk" to the U.S. economy.
If the labor market and other facets of the economic picture turn out better than expected, Federal Reserve officials may be motivated to ramp up their hikes and position the economy for a slow growth rate.
Alternatively, if the Fed slows down its pace of rate hikes in response to economic conditions, the economy will have begun to slow anyway.
Alexandra Semenova is a reporter for Yahoo Finance. Follow her on Twitter @alexandraandnyc