- Traders bet Fed will raise rates by 100 basis points
- Gasoline, food and rents have pushed inflation to 9.1%
- If this escalation continues, the U.S. could enter a recession before the end of the year
The 9.1% inflation data released this morning caused traders to increase their bets that the Fed will make a larger interest rate hike than expected at its monetary policy meeting at the end of this month.
After reports that gasoline, food and rent prices pushed inflation to 9.1% last month, futures traders linked to the Fed’s benchmark rate estimated a high probability of 40% that the Fed will raise rates by more than 100 basis points at its next meeting
Core inflation (which excludes food and energy prices) came in at 5.9% from 6.0% measured in May. This number is just below expectations. The Fed’s concern will be to combat so-called headline inflation. Consumer prices are under pressure and if the Fed cannot control them, they will continue their upward spiral, which will lead to a more aggressive policy from the agency.
It is expected that rates will rise rapidly and by large amounts. This would lead to a recession scenario, a forecast in which more and more analysts agree. These new inflationary numbers refute some positions of Fed officials who maintained that inflation would go down in the future. If this rise in prices continues, the United States will enter a recession before the end of the year.
A tough road ahead for the Fed
The Fed only began its tough rate hike policy in March of this year. It has already raised the benchmark overnight lending rate by 1.5 points. With the data released today, it is estimated that the rate may reach the range of 3.5%-3.75%. A higher rate than was forecast by Fed officials themselves just three weeks ago.
For now, the labor market has managed to resist rate hikes and the unemployment number remains stable at 3.6%.
The main Wall Street indexes opened lower after the inflation data was released. The Dow Jones, S&P500 and Nasdaq are each down 1%.
