The dismal June inflation report has some Wall Street economists betting that the Federal Reserve will approve a historic 100-basis point interest rate hike in July as policymakers race to tame runaway consumer prices.
About 44% of traders are pricing in the chance of a full percentage point rate increase during the Fed's meeting on July 26-27, according to the CME Group, which tracks trading. That would be the first rate hike of its size since the Fed started announcing moves in the overnight federal funds rate in 1994.
Still, a majority of traders – about 55% – are still betting the Fed will stick with a 75-basis point increase at the end of the month.
The possibility of a mega-sized rate hike comes on the heels of a scorching-hot Labor Department report released Wednesday that showed the consumer price index rose 9.1% in June from a year ago, exceeding market expectations. It marks the fastest pace of inflation since December 1981.
"Everything is in play," Atlanta Fed President Raphael Bostic told reporters in St. Petersburg, Florida, on Wednesday following the latest inflation data. Asked whether that included a full percentage point interest rate hike, Bostic said: "It would mean everything."
Federal Reserve Chairman Jerome Powell largely rebuffed the possibility of a 100-basis point interest rate hike at the central bank's June meeting, during which officials pivoted at the last minute and voted to lift rates by 75 basis points – the first increase of its kind since 1994. Powell signaled that either a 50-basis point or 75-basis point hike was likely in July.
But that was before the June inflation report, which experts agree was resoundingly bad, 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.
Other strategists are placing bets on a massive Fed rate hike: Citi economists in a note on Thursday said they see a 100-basis point rate increase as the most likely outcome in July. That would put the federal funds target range between 2.5% and 2.75%.
"In June the committee showed it would react to each monthly inflation reading," Citigroup economists led by Andrew Hollenhorst wrote in a note to clients. "We now expect the Fed to deliver a 100 basis-point rate hike at the meeting later this month."
The Fed is in a precarious situation as it walks the line between cooling consumer demand and bringing inflation closer to its 2% target without inadvertently dragging the economy into a recession. Hiking rates tends to create higher rates on consumer and business loans, which slows the economy by forcing employers to cut back on spending.
Powell has acknowledged the risk of a recession but maintained that it's more important for the Fed to tame inflation, even if an economic downturn ensues.
"Is there a risk we would go too far? Certainly there’s a risk," Powell said last month. "The bigger mistake to make—let’s put it that way—would be to fail to restore price stability."