In Violent Shift, Market Now Says Fed Is Likely To Raise Rates by 75 Basis Points

Jerome Powell departs after taking the oath of office for his second term as Chair of the Board of Governors of the Federal Reserve System at the Federal Reserve Building in Washington, DC, on May 23, 2022. (Photo by OLIVIER DOULIERY / AFP) (Photo by OLIVIER DOULIERY/AFP via Getty Images)
Photo by OLIVIER DOULIERY/AFP via Getty Images

In a violent market shift, trading in the futures market now implies a better than 90 percent chance that the Federal Reserve raises its interest rate target by three-quarters of a percentage point on Wednesday.

The market has reacted to the latest inflation data in the form of the Consumer Price Index and the Producer Price Index, both of which showed prices still rising at a rapid pace. The University of Michigan’s survey of consumers and a survey by the New York Fed both showed near-term inflation expectations rising, a sort of vote of no-confidence that the Fed will be able to tame inflation soon.

A week ago, prices for Fed Funds futures implied less than a four percent chance of a 75 basis point hike and a 96 percent chance of a 50 basis point hike. Now it implies a 90.5 percent chance of the bigger hike, according to the CME Group’s Fed Watch tool.

Economists at J.P. Morgan Chase and Goldman Sachs now say they see a 75 basis point hike.

A Wall Street Journal article on Monday night appeared to hint that Fed officials were now leaning toward a 75 basis point hike. The article said official wouldn’t be “constrained by their previous guidance” of a 50-basis-point increase. Both Goldman and J.P. Morgan analysts cited the article in their client notes, saying it appeared to be a message from the Fed to prepare the market for a 75 basis point increase.

An even bigger hike is possible. J.P. Morgan economist Feroli wrote that “one might wonder whether the true surprise would actually be hiking 100bp, something we think is a non-trivial risk.”

 

Fed officials began a two-day meeting on Tuesday that will conclude Wednesday. A decision on interest rates is scheduled for 2 p.m.

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