Stubbornly hot US inflation is fueling bets that the Federal Reserve will get more aggressive about trying to cool price pressures and even potentially ditch its own forward guidance by delivering a jumbo-sized interest rate hike in coming months.
Fed policymakers had already all but promised half-point interest rate hikes at their meeting next week and again in late July, following May’s half-point hike and the start of balance sheet reductions this month. That would be more policy tightening in the space of three months than the Fed did in all of 2018.
On Friday, traders of futures tied to the Fed policy rate began pricing in an even bolder path after US Labor Department data showed sharply higher food and record gas prices pushed the consumer price index (CPI) up 8.6% last month from a year earlier. A separate University of Michigan survey showed longer-term inflation expectations rising to their highest since 2008.
Prices of Fed funds futures contracts now reflect better-than-even odds of a 75-basis-point rate hike by July, with a one-in-four chance of that occurring next week — up from one-in-20 before the inflation report — and a policy rate in at least the 3.25 percent-3.5 percent range at year end.
Yields on the two-year Treasury note, seen as a proxy for the Fed’s policy rate, topped 3 percent for the first time since 2008.
“We believe that today’s inflation data – both the CPI and UMich inflation expectations – are game changers that will force the Fed to switch to a higher gear and front-load policy tightening,” wrote Jefferies’ AnetaMarkowska, who joined economists at Barclays on Friday in forecasting a 75-basis-point rate hike at the Fed’s June 14-15 meeting.
Most economists still expect a half-point hike next week, and more of the same at subsequent meetings through at least September if not further. – Reuters
