Traders boosted bets on Wednesday the Federal Reserve could deliver an even bigger interest-rate hike at its policy meeting later this month after the latest government data showed inflation, already at a 40-year high, accelerating further.
A bevy of central bankers over the past couple of weeks have already signaled support for a 75 basis point rate increase at their upcoming policy meeting on July 26-27, following a similar-size hike at their last meeting in June.
After the report showing gas, food and rent prices drove overall inflation up 9.1% last month, traders of futures tied to the Fed’s policy rate swiftly priced in a more than 40% probability of an even bigger 100-basis-point rise at the coming meeting.
That was up from about a one-in-nine chance seen before the report, which also showed underlying inflation slowing.
The slight easing of so-called core inflation, which excludes food and energy prices, to 5.9% in the 12 months through June from 6.0% in May is less than economists expected. It offers little comfort to Fed Chair Jerome Powell, who will likely focus rather on the continued rise in so-called headline inflation.
Those price pressures are stoking concern that if the Fed does not begin to get inflation in check soon, business and consumer expectations of a torrid rate of future price increases could become entrenched, forcing the Fed to move even more aggressively.
“It really pushes the Fed even further into the corner they’ve been operating in. They need to raise rates quickly and they need to raise rates by large amounts,” said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. “Unfortunately we were looking for good news and this is not good news.”
The ramp up in inflation and the Fed’s likely response as it tries to quash it raises the likelihood that the Fed will put the brakes on too hard and send the economy into recession, an increasing number of analysts say.
“For the Fed, this latest reading is miles away from ‘compelling evidence’ that inflation is coming down,” said Gregory Daco, Chief Economist at EY-Parthenon. “Overall, we believe the U.S. economy is headed for a mild recession around the turn of the year.”
The Fed began tightening policy only in March, and has already raised its benchmark overnight lending rate by 1.5 percentage points. Financial markets now predict that rate will reach the 3.5%-3.75% range by year end, higher than Fed policymakers themselves predicted just three weeks ago.
A very tight labor market has so far withstood those swift rate hikes, with unemployment remaining at 3.6%, near a historic low.