Interest rate traders are starting to bet on the first emergency rate hike from the Federal Reserve since 1979 following the fastest inflation reading since 1982.
The fastest inflation in forty years, paired with a Federal Reserve that continues to add liquidity into an already-bloated market, has accelerated calls for a near-term rate hike and boosted the odds of an emergency move over the coming weeks.
The CME Group’s FedWatch tool now suggests an 88% chance of a 50 basis point rate hike when the Fed meets next month, up from just 33% last week, following data from the Commerce Department showing January inflation sped to an annual rate of 7.5%, the fastest since 1982.
St. Louis Fed President James Bullard has also said he has become “dramatically” more hawkish as a result of the inflation print and wants the Fed’s base lending rate to be 1% higher by June, a move that would require three consecutive 25 basis point increases. Goldman Sachs, meanwhile, is now forecasting seven hikes — for a previous estimate of five — before the end of the year in order to tame inflation pressures that are unlikely to ease for many months.
Fed Rate Hikes, Zillow, Ford, Elon Musk And Stock Markets – Five Things You Must Know
President Joe Biden waded into the inflation discussion yesterday when he told reporters that “we have been using every tool at our disposal” to tame consumer price increases, adding that faster inflation is a “reminder that Americans’ budgets are being stretched in ways that create real stress at the kitchen table.”
“We’re sticking with our forecast of a 25 basis point increase in rates next month, but the chance of a 50 basis point hike has risen sharply, and the balance sheet hawks — who have mostly been quiet since mid-January — have already started again to make the case for a faster and earlier run-off,” said Ian Shepherdson of Pantheon Macroeconomics. “We remain of the view that they won’t get their way, but markets showed last month just how nervous are investors about the idea of a hefty full spectrum Fed tightening.”
However, the odds of Saturday rate hike between now at the March meeting, the first since October of 1979, have jumped to around 25%, according to data from Bank of America’s weekly “Flow Show” report, following yesterday’s faster-than-expected inflation reading which showed headline consumer prices rising a 7.5% clip, the fastest since 1982 and well ahead of the 7.1% pace recorded in Mexico — where base rates sit at 5.5% — over the same month.
The Flow Show report also notes that, while the 1979 rate hike came amid a period of Fed tightening, the central bank has injected more than $200 billion in excess liquidity into the markets over the past 27 trading days through its quantitative easing purchases, “a sum greater than market cap of Netflix (NFLX) – Get Netflix, Inc. Report“.
Benchmark 2-year Treasury note yields bumped to 1.594% in early New York trading, following on from yesterday’s 21.4% leap, the largest single-day move for the 2-year note since June of 2009.
Higher up the curve, 10-year yields held above 2% — the highest since November 2019 — in the wake of yesterday’s inflation data and a solid $37 billion auction earlier in the week.
