The bigger-than-expected increase in the pace of inflation in June has sent expectations for a rate hike at the end of the month into warp speed.
Fed funds futures are now pricing in a nearly 80 percent probability of a full percentage-point rise at Federal Open Market Committee meeting concluding two weeks from Wednesday, according to the barometer of the contracts maintained by the CME Group.
As recently as Tuesday, the market was pricing in a 92 percent chance of a 75 basis point hike. One week ago, prices implied a zero percent change of a 100 basis point hike.
A basis point is one-hundredth of a percentage point. So a 75 basis point hike indicates a 2/3 of a percentage point increase and a 100 basis point hike indicates a hike of one percentage point.
Reporters on Wednesday pressed Atlanta Fed President Raphael Bostic on how far the Fed would go.
“Everything is in play,” Bostic said, appearing to indicate that the Fed would at least consider a bigger hike.
Bostic said that the inflation report indicated that “the trajectory is not moving in a positive way.”
Market prices also imply a bigger hike at the Fed’s following meeting in September. Prior to Wednesday, they were pricing a 50 basis point hike on top of a 75 basis point hike in July. Now they imply a 75 basis point hike on top of the 100 basis point hike, with the end result being rates being fifty basis points higher at the end of the next two meetings.
The Japanese bank Nomura now expects a 100 basis point hike, according to the Wall Street Journal’s Nick Timiroas.
Timiraos also said Richmond Fed tom Barkin did not rule out a 100 basis point increase.
Expectations for a much bigger Fed hike could send mortgage rates higher, although fears of a coming recession could counter-balance the pressure from a higher Fed target. Mortgage rates tend to follow the direction of the 10-year Treasury yield rather than the overnight lending rate directly controlled by the Fed. On Wednesday, yields on the 10 year Treasury dipped.