Pre-Blackout FOMC

FOMC perspective… Before starting the pre-FOMC blackout, it is useful to take a look at how clear the policy views are in the light of the latest data. Some policy makers have already voiced their support for another aggressive rate hike in July, and this view seems to gain weight and be reflected in the underlying assumption and pricing.

Fed speakers… Atlanta Fed Chairman Bostic described the latest inflation data as worrying and emphasized that every scenario, including 100 basis points, is on the table. Speaking to the New York Times, San Francisco Fed Chair Daly stated that although a 75 basis point increase is the most likely possibility, a 100 basis point increase is also one of the options.

Interest pricing… Investors have increased their bets that the Fed will raise interest rates by 100 basis points at its meeting later this month, after US consumer prices rose 9.1% a year earlier in June and showed the biggest gain since late 1981.

Fed futures funds rate pricing… Source: Bloomberg, CME Fedwatch

Conclusion? Pricing that the Fed may increase the target federal funds rate by 1 point at its meeting on July 26-27 has become active. After the above-expected consumer price index in June, market expectations started to rise and rose even more as the Bank of Canada increased the interest rate by 1%. The minutes of the Fed’s June meeting pointed to widespread concern that expectations for higher prices would “set in” if the FOMC were sufficiently unbelievable that it was committed to tackling inflation. This shows that a large part of the committee is determined to raise interest rates above the 3% band. As real economic growth slows, the yield curve may invert further as hawkish Fed expectations persist.

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