Fed Could Entertain Full Point Rate Hike in the Wake of Inflation Scorcher

Would the US Federal Reserve actually raise interest rates this month by a full point (or one hundred basis points, depending on which sounds more dramatic)? Markets are very suddenly saying yes.

On Wednesday, the Fed Funds Futures probability priced in a 77% chance of a full point rate hike, according to the CME Group’s FedWatch Tool. That would amount to the largest increase since the Fed began using overnight interest rates in the 1990s.

Keep It 100

A scorching hot consumer price index jump of 9.1% — which unexpectedly topped the Dow Jones estimate of 8.8% — changed a lot of minds overnight. On Tuesday, the Fed Funds Futures probability priced in a mere 7% chance that a full point rate would arrive after the reserve bank’s governors meet on July 27. In other words, hardly anyone thought that the Fed, while determined to rein in inflation, could crank its next rate hike up to 100. Now, almost everyone does.

A one-point hike wouldn’t be the Fed’s first sudden, aggressive move. Last month, the central bank raised rates by 75 basis points, the largest hike since 1994, despite earlier hints of just a half-point raise. And the latest consumer price numbers, released by the Bureau of Labor Statistics on Wednesday, pretty much begged for action:

  • On top of the 9.1% national rise in annual living costs recorded in June, the fastest pace since November 1981, seven metro areas saw double-digit inflation. So mail a Get Well Soon card — or some frozen gel packs wrapped around a slightly-less-inflated steak — to your friends in Baltimore, Miami, Houston, Seattle, Phoenix, Atlanta, and Anchorage.
  • “You have to put 100 on the table for July,” Andrew Hollenhorst, Citigroup’s chief US economist, told Bloomberg. “Everybody should be quite cautious about calling peak inflation, a few months ago the peak was supposed to be 8.3%.”

At the 100th Meridian: If the Fed opts for a full point hike, it won’t be alone. On Wednesday, The Bank of Canada — where inflation surged to 7.7% in May — hiked interest rates by a full percentage point to 2.5% in a surprise move. The US rate is currently 1.5%.

It’s a Gas: Yes, fuel prices are still up 47% over the past year, but they have tumbled roughly 38 cents a gallon in the last month. That’s your nugget of good news in a storm of, well, pricier chicken nuggets.



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