Bets rise on bigger Fed rate hikes as inflation sears -Breaking
© Reuters. FILE PHOTO – A man shops at Trader Joe’s in Manhattan, New York City. This photo was taken March 10, 2022. REUTERS/Carlo Allegri
Lindsay and Ann Saphir, (NYSE: ) Dunsmuir
(Reuters). – The soaring U.S. inflation rate is fueling speculation that the Federal Reserve may need to be more aggressive with interest rate increases to lower price pressures. With the possibility of a 75 basis-point rate increase seen increasing and the Federal Reserve expected to reach 3% before year’s end, there are high chances that the Federal Reserve will raise rates by an additional 25%.
A U.S. Labor Department report on Friday showed that the consumer price index (CPI), rose 8.6% in December from the year before. It was also up record highs for gas and food, which blew away any expectations of inflation having peaked last month.
Core CPI (which strips out volatile energy, food, and fuel prices) rose 6%. This is slightly less than April’s pace of 6.2% but still far below the “clearly convincing” indicator that there has been a cooling in price pressures. Fed Chair Jerome Powell said he needed to see this sign before slowing down rates hikes.
Greg McBride, chief bankrate financial analyst wrote that “so much for the notion of inflation having peaked.” It seems unlikely that any hopes of the Fed easing up the pace at which rate increases are made after its June and July meetings.
Fed policymakers already promise half-point increases in interest rates at their next meeting next week. The second will be held late July.
Interest rate futures traders still expect a Fed meeting to result in a 50% interest rate increase. However, they now anticipate about 20% of an even larger hike this month than the 5% that was predicted before May’s inflation report.
CME FedWatch’s Summary of Fed Funds Futures Pricing shows that there are 50-50 odds of the Fed raising rates by 75basis points at its July meeting.
The yields of the Treasury two-year note (used as an indicator for Fed’s policy rates) rose by the greatest in four months, surpassing 3% for first time since 2008.
At the Economic Society Barclays (LON.) On Friday, they stated that U.S. central bankers had “good reason” to shock markets by offering a larger rate increase than they expected next week. However they acknowledged it was close.
Some policymakers thought that rate rises would be accompanied by easing supply chain pressures. They also expected a shift in household spending away form supply-constrained goods to increase price pressures.
Friday’s inflation report indicated the contrary.
After sinking for some time, used car prices reversed their course. Airfare fares increased by 12.6% and 37.8% respectively from the previous month. The largest jump in prices since February 1991 was 5.5% for shelter, which tends to follow trends.
These numbers suggest that U.S. central banking officials may remain locked in to half-point rises at their September meeting, and possibly beyond. They are trying to control inflation by slowing the economy down.
Futures traders who are linked to the Fed’s policy rate now bet on half-point rate rises through September. However, there is always the possibility of a bigger rate hike. Futures contracts reflect the expectation that the policy interest rate will end the year within the 3%-3.255% range.
Current Fed policy rate targets are 0.75%-1.1%. Fed officials hope to increase it, but not undermining an historically tight labor market or sending the economy into recession.
The May inflation report seems to make this task more challenging.
“These are ugly numbers…I’d say we’ll probably be in a recession in the fourth quarter of this year with confirmation in the second quarter of 2023,” said Peter Cardillo, chief market economist at Spartan Capital Securities.
U.S. consumer mood plunged to record levels in the early part of June according to University of Michigan preliminary data.