Searing inflation fuels bets on a July Fed rate hike

U.S. Federal Reserve Board Chairman Jerome Powell speaks during his Senate Banking, Housing, and Urban Affairs Committee renomination hearing on Capitol Hill in Washington, U.S., on 11 January 2022. Brendan Smialowski/Pool via REUTERS

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July 13 (Reuters) – Investors were betting on Wednesday that the U.S. Federal Reserve would hike rates by 100 basis points this month after a rather dismal inflation report showed price pressures, reaching already a 40-year high, still accelerating.

“It’s all on the line,” Atlanta Fed President Raphael Bostic told reporters in Florida when asked specifically if the Fed could go even further than the 75 basis point hike that was reported. she announced last month.

A host of central bankers over the past two weeks had signaled they would back what would be a second straight 75 basis point rate hike at their next policy meeting on July 26-27.

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But after Wednesday’s Labor Department data showed rising gas, food and rent costs pushed the consumer price index (CPI) up 9.1% in the month last year compared to the previous year, the point of view may have changed. Read more

Traders of Fed key rate futures now price a 70% chance of a full one percentage point hike at the next meeting, according to contract analysis by CME Group.

That was up from around a one-in-nine chance before the report, which also showed a slowdown in underlying inflation.

But even the slight slowdown in so-called core inflation, which excludes more volatile food and energy prices, to 5.9% over 12 months to June from 6.0% in May, came in below market expectations. economists. More worryingly, on a monthly basis, the core CPI climbed 0.7% after rising 0.6% in May, reaching its highest level in a year.

Neither gauge offers comfort to Fed Chairman Jerome Powell, who has pointed to the so-called slowing in headline inflation given the outsized impact of the cost of gasoline and the food on typical American households.

These price pressures are fueling fears that if the Fed does not begin to get inflation under control quickly, business and consumer expectations of a torrid rate of future price increases could take root, forcing the Fed to act. even more aggressively.

“It really pushes the Fed even further into the corner that it’s operating in. It needs to raise rates quickly and it needs to raise rates in a big way,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Unfortunately, we were looking for good news and this is not good news.”

Other central banks are also feeling the pressure with the Bank of Canada raising its benchmark interest rate by 100 basis points on Wednesday in a bid to rein in soaring inflation, a surprise move and the most significant in nearly 24 years old. Read more

Bostic said the latest inflation reading could force officials to consider a 100 basis point hike at its July meeting. While Bostic said he needed to study the “nuts and bolts” better, he felt that “today’s numbers suggest the trajectory is not changing in a positive way…How much I have need to adapt is really the next question.”


Ahead of its previous meeting in June, the Fed telegraphed a 50 basis point move before pivoting at the last minute to a three-quarter point hike on the back of a worse-than-expected inflation report for May, as well as a decline in consumer inflation. same-day expectation survey.

The persistence of such high inflation and the strength of the central bank measures needed to crush it also once again reinforce fears of a recession on the horizon.

A Fed survey of businesses across the country released later on Wednesday showed heightened pessimism about the outlook for the economy, with nearly half of central bank districts saying businesses saw an increased risk of recession, while substantial price increases were reported across all districts with “most contacts expecting price pressures to persist at least through the end of the year.” Read more

Fed research released this week based on modeling bond market yields puts the risks of a recession next year at around 35% if the Fed sticks to its planned benchmark rate hike path, but at 60% if the Fed removes the adaptation measures more quickly.

“With supply conditions showing few signs of improving, it behooves the Fed to rein in via higher rates to allow demand to better match supply conditions. The threat of a recession is growing,” James said. Knightley, chief international economist at ING.

The Fed only started tightening policy in March and has already raised its overnight rate by 1.5 percentage points. Financial markets are now predicting that the rate will hit the 3.5% to 3.75% range by the end of the year, higher than even Fed policymakers predicted a while ago. barely three weeks.

A very tight labor market has so far resisted these rapid rate hikes, with unemployment remaining at 3.6%, near a historic low. However, this is seen as a double-edged sword as it also raises concerns that such competition for labor will eventually have to cool down to dampen inflation. Read more

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Reporting by Lindsay Dunsmuir and Ann Saphir; Additional reporting by Howard Schneider and Sinead Carew; Editing by Chizu Nomiyama

Our standards: The Thomson Reuters Trust Principles.

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