High US inflation give rise to expectations of 100 bps rate hike by Fed this month

14 Jul 2022 , 10:05 AM

After Wednesday data from the Labor Department showed rising costs of gas, food and rent drove the consumer price index (CPI) up 9.1% last month from a year earlier, views may be evolving that The US Federal Reserve may ramping up its battle with 40-year high inflation with a supersized 100 basis points rate hike this month.

“Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida after inflation report. Asked if that included raising rates by a full percentage point, he replied, “it would mean everything.”

Investors upped bets the central bank could raise rates by 100 basis points at its July 26-27 meeting, which would be the largest increase since the Fed started directly using overnight interest rates to conduct monetary policy in the early 1990s.

Fed Chair Jerome Powell earlier told reporters last month after the central bank raised rates by 75 basis points, to a range of 1.5% to 1.75%, that either a 50 or 75 basis-point increase was likely in July.

Traders of futures tied to the Fed’s policy rate are betting they already have. They are now pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting, according to an analysists.

The higher than expected US inflation means the Fed will continue its aggressive tightening in the near-term with another hike in July. But the long-term bond yields in the US indicate a possible rate cut by March 2023. In brief, this 9.1% inflation print is likely to be the peak inflation.