Markets brace for 100-point Fed rate hike as inflation roars to new high

Hotter-than-expected inflation could force Fed to take drastic measures

Some Wall Street traders are betting that the Federal Reserve will take the most aggressive step in decades as it races to catch up with scorching-hot inflation.

While market consensus is for a half-point interest rate hike at the Fed's policy-setting meeting this week, the odds for a larger increase next month are surging, with a potential 75-basis point or 100-basis point jump on the table in July. About 16% of traders are penciling in a 100-basis point jump next month, compared to 53% forecasting a 75-basis point increase, according to the CME Group's FedWatch tool, which tracks trading. 


The new projections come on the heels of a scorching hot Labor Department report that showed the consumer price index, a broad measure of the price for everyday goods, including gasoline, groceries and rents, rose 8.6% in May from a year ago, faster than expected. Prices jumped 1% in the one-month period from April. 

Federal Reserve

A man wearing a mask walks past the U.S. Federal Reserve building in Washington, D.C., the United States, on April 29, 2020. (Xinhua/Liu Jie via Getty Images / Getty Images)

It marks the fastest pace of Inflation since December 1981. 

The dismal report prompted some banks, including Barclays and Jeffries, to revise their expectations for the Fed meeting this week, which concludes on Wednesday. The strategists now expect central bankers to approve a 75-basis point hike as they try to project confidence to the markets.

"The U.S. central bank now has good reason to surprise markets by hiking more aggressively than expected in June," the Barclays strategists wrote in a note Friday. "We realize it is a close call and that it could play out in either June or July. But we are changing our forecast to call for a 75-basis point hike on June 15." 

Policymakers have not lifted the short-term interest rate by 75-basis points since 1994, and have not approved a 100-basis point increase since Paul Volcker led the central bank and ran an aggressive inflation-crushing campaign in the early 1980s.

Fed Chairman Jerome Powell inflation

In this Jan. 29, 2020 file photo, Federal Reserve Chair Jerome Powell pauses during a news conference in Washington. (AP Photo/Manuel Balce Ceneta / AP Newsroom)

Federal Reserve Chairman Jerome Powell rebuffed the possibility of a 75-basis point interest rate hike at the beginning of May following a policymakers' meeting at which they voted to lift rates by a half-point. Officials have signaled that half-point rate hikes are on the table in June and July, although it's unclear how Friday's report could affect that.

"A 75-basis point increase is not something that the committee is actively considering," Powell told reporters at the post-meeting press conference. 


But that was before the April and May inflation reports, which both came in hotter than expected, underscoring just how strong inflationary pressures in the economy still are. Bond yields spiked higher and stocks tumbled after the worse-than-expected report fueled fears that the Fed will have to ratchet up its inflation battle.

"What an ugly CPI print. Not only was it higher than expected on almost all fronts, pressures were clearly evident in the stickier parts of the market," said Seema Shah, chief strategist at Principal Global Investors. "The Fed's price stability resolve is going to be really tested now. Policy rate hikes will need to be relentlessly aggressive until inflation finally starts to fade, even if the economy is struggling."