Wall street believes a bigger rate hike is coming

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If you don’t live under a rock, you should know that the US inflation rate has hit a 40-year high.

The red hot June inflation report released by the Bureau of Labor Statistics yesterday is leading to more trader bets on a higher rate hike by 100 basis points (bps) at the Federal Reserve’s two-day policy meeting later this month. Keep in mind that last month, the Fed had raised its federal funds rate by 75 basis points; and a 100 basis point this month would seem out of place.

The Consumer Price Index (CPI) jumped 9.1% from a year ago, up from the 8.8% economists had expected, and a fresh 40-year high. After the report, traders put the possibility of a 100-bp rate hike at the Fed’s July meeting at 84%, with a 15% probability of a 75-bp hike.

The probability of the 100-bp rate hike also got a boost after the Bank of Canada surprised investors by raising its policy interest rate by a full percentage point yesterday afternoon.

When asked about the potential of a 100-bp increase at a news conference last month, Fed Chair Jerome Powell said, “We’re going to react to the incoming data and appropriately, I think. So I wouldn’t want to put a number on what that might be.”

It seems the Fed is more cautious especially after the “inflation is transitory” burn last year. Anyway, the inflation is not transitory, and it’s also not slowing down. A 100 bps feels like the only way to stop inflation at the moment, unless the Fed found a “silver bullet”, which is highly unlikely.


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