Severe inflation is fueling a boost from the Fed’s massive rate hike

(Reuters) – The US Federal Reserve is expected to ease its battle with 40-year high inflation with a 100 basis point interest rate hike this month after a bleak inflation report showed price pressures accelerating.

“It’s all in play,” Atlanta Fed President Rafael Bostic told reporters in Florida when asked about the possibility.

While he said he still needs to consider the “nuts and bolts” in the report, “Today’s numbers indicate that the trajectory is not moving in a positive way. … How much do I need to adapt is really the next question.”

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Bostick has been among a group of central bankers in recent weeks indicating support for a second consecutive interest rate increase of 75 basis points at the upcoming policy meeting on July 26-27.

But after Wednesday’s data from the Labor Department showing that rising gas, food and rent costs drove the CPI up 9.1% last month from a year earlier, opinions are likely to develop. Read more

Futures traders tied to the Fed’s policy rate are betting they already have it: They’re now pricing with a near 80% probability of a full percentage point rise at the upcoming meeting, according to contracts analysis by CME Group.

That was higher than the one in nine chance seen before the report, which also showed core inflation accelerating, with the exception of the more volatile food and energy prices, on a monthly basis.

The expectation that the Fed will get bolder to stem inflation also raises the concern that policy makers will go too far and hurt economic growth as well.

Long-term Treasury yields have fallen, making the so-called yield curve inversion the clearest it has been for more than 20 years.

The reversal is seen as a harbinger of a slowdown because it indicates that investors are counting on slowing growth. Futures trading indicates that investors expect the Federal Reserve may need to start cutting interest rates again by the middle of next year.

“The June CPI report was an outright disaster for the Federal Reserve,” wrote Tim Duy of SGH Macro Advisors. “The deep inversion of the yield curve screams recession, and the Fed has made it clear that it prioritizes restoring price stability over anything else.”

Other central banks are also feeling the pressure with the Bank of Canada on Wednesday raising its benchmark interest rate by 100 basis points in an attempt to tame high inflation, a surprise move and the largest in nearly 24 years. Read more

‘Risk of recession is increasing’

Fed Chair Jerome Powell and other policymakers are becoming increasingly concerned that business and consumer expectations about the rate of future price increases are becoming entrenched. They have shown that they will react quickly when the data goes wrong.

Ahead of its previous meeting in June, the Fed telegraphed a 50 basis point move before pivoting at the last minute to a three-quarter point increase on the back of a worse-than-expected inflation report for May, as well as downbeat consumer inflation. Clear forecasts on the same day.

The persistence of such high inflation and the force of the central bank’s moves needed to crush it are once again heightening fears of a recession on the horizon.

The Fed’s nationwide survey of businesses, published later on Wednesday, showed increasing pessimism about the outlook for the economy, with nearly half of central bank regions reporting businesses seeing an increased risk of a recession, while significant increases were reported in Prices in all regions with “most contacts expect price pressures to continue until at least the end of the year.” Read more

Federal research published this week based on modeling bond market yields puts the chance of a recession next year at around 35% if the Fed sticks to its expected base rate hike path, but at 60% if the Fed removes easing faster.

James Knightley, chief international economist at ING, said: “With few signs of improving supply conditions, the onus of the Fed is to put the brakes on higher rates to allow demand to better match supply conditions. The risk of a recession is increasing. “.

The Fed only began tightening policy in March and has already raised the overnight lending rate by 1.5 percentage points. Financial markets now expect the rate to reach a range of 3.5% to 3.75% by the end of the year, higher than what Fed policymakers themselves had predicted just three weeks ago.

The ultra-tight labor market has so far weathered those rapid rate hikes, with the unemployment rate remaining at 3.6%, near a historic low. However, this is seen as a double-edged sword as it also raises concerns that such competition for labor will eventually have to cool down to ease inflation. Read more

The US Senate confirmed Wednesday that Michael Barr, a former Treasury official, serving as the Fed’s deputy chief of oversight, to fill the last vacancy on the Fed’s seven-member board of directors. Read more

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(Lindsey Densmeyer and Anne Sphere report); Additional reporting by Howard Schneider, David Morgan and Sinead Caro. Editing by Chizu Nomiyama and Jonathan Otis

Our Standards: Thomson Reuters Trust Principles.

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