100 bps July 2022 Fed Rate Hike on the Table

Fed Rate Hike: Despite the looming recession risks, markets are wagering a 100 bps rate hike in July, as Fed will likely fight the inflation monster head-on. The Bank of Canada’s (BOC) unexpected 100 bps lift-off also favors hawkish Fed tightening expectations. The Fed sentiment is leading the way so far this Thursday, weighing negatively on the Gold (XAUUSD) pair.

US inflation hits record high in June

The closely-watched indicator by the Fed, the US inflation, advanced to 9.1% YoY in June vs. 8.8% expectations, hitting the highest level in four decades. The Core CPI, which excludes volatile food and energy prices, came in at 5.9% in the same period from the 6% previous figure but exceeded expectations of 5.8%. Hotter CPI in the world’s largest economy suggested no signs of inflation peaking.

Futures on the federal funds rate have increased the chances of a full percentage-point hike at the Federal Reserve meeting later this month after a hotter-than-expected U.S. annual inflation print.

The Labor Department’s report showed the Consumer Price Index (CPI) rose in June on both a monthly and annual basis by 1.3% and 9.1%, respectively. 

Prior to the release of the CPI data, fed funds futures had priced just a 0.2% chance of a 100 basis-point hike this month. After the CPI data was released, that percentage surged to 33% immediately and was last at 28%. The market though still expects the Fed to raise the rate by 75 bps, with a 72% chance attached.

The so-called “core” CPI, which excludes volatile food and energy prices, rose 5.9% year-on-year.

A Reuters poll showed year-on-year CPI in June had been estimated to come in at 8.8%, while the monthly core index was expected to have eased to 5.8% from 6.0% in May.

By the end of the year, the futures market has factored in a fed funds rate of 3.6% after the data, from 3.41% just before. The current fed funds rate is at 1.58%.

Fed policymakers turn extremely hawkish for July interest rate policy

The statement from Fed policymakers for July monetary policy has turned extremely hawkish now after the price pressures surpass 9%. San Francisco Fed chief Mary Daly, in an interview with New York Times, stated that “My most likely posture is 0.75%, because of the data I have seen”. In today’s session, Fed Governor Christopher Waller is scheduled to bring forward his views on inflation and expected rate hike.

Recession situation seems more visible now

The global economy is going through the phase of cost-push inflation and the market participants and critics are blaming the Fed for a delayed response to the price pressures. No doubt, the upbeat employment opportunities and solid growth prospects in the US economy are efficient to take the bullet in place of the Fed. The upbeat catalysts are supporting the Fed to tighten policy further vigorously. However, the inflation rate is not displaying any sign of making even an interim top.

There is a limit for the economic catalysts to take forward the burden of a higher inflation rate. In case of exhaustion, demand will shift extremely lower and the recession situation will be for real.

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