Hike rates

Investors peg a 50% chance the Fed will hike rates by 100 basis points

  • Investors expect a 50% chance that the Fed will raise interest rates by a full percent this month.
  • With inflation up 9.1% through June, expectations of Fed tightening are rising.
  • The last time the central bank raised rates by 100 basis points was in early 1989.

Higher-than-expected inflation through June has raised expectations among investors that there is a good chance the


Federal Reserve

could raise interest rates by up to a full percentage point this month.

The interest rate futures market shows that investors are pricing in a 48.7% chance that the Fed will raise rates by 100 basis points to 2.75% at its next meeting on July 27. price pressures soared 9.1%, well above expectations, according to CME’s FedWatch Tool.

The last time the Fed raised interest rates this much was more than 30 years ago, in February 1989, when it raised them from 8.75% to 9.75%. Eight months later, the stock market suffered one of its biggest one-day declines in history, when the Dow Jones crater 7% in what is now known as “Black Friday”. .

The extremely high inflation that is sweeping through the US economy is forcing the Fed to put the brakes on with an aggressive monetary policy. He started with a Up 75 basis points last monthwhich was already the largest since the mid-1990s, but with the US consumer price index climbing 9.1% through June – the fastest rate since November 1981 – it has investors thinking the Fed will only get tough.

Such rapid price growth propelled the dollar to its highest level in 20 years and drove the greenback to the point where it reached parity with the euro for the first time since late 2002 this week. It also raised fears that the US economy could collapse


recession

as higher rates erode consumer spending and business investment.

On Wednesday, the futures market showed investors pegged up to an 80% chance that the central bank would raise rates by one percentage point. But those expectations have since dimmed.

Talk of the Fed raising interest rates by a full percentage point has circulated in the industry, with key economists like Mohamed El-Erian saying the latest reading of inflation leaves the Fed with no room for error. no choice but to act more aggressively.

“It is safe to raise interest rates by 0.75 percentage points later this month and may well be looking at a 1 percentage point hike,” he said.

Major banks, including Citi, echoed that sentiment, saying a 100 basis point rate hike in July is likely, by Bloomberg.