Fed and 100 Bps increase probability

Monetary policy meetings… The Fed’s monetary policy meeting will be held on July 27 next week. While this was considered a realistic possibility before the Central Bank increased the policy rate by 75 basis points in July, the markets increased the possibility of a 100 basis point increase due to renewed concerns after the high inflation data and directed pricing to this possibility.

The European Central Bank’s interest rate decision will be announced on Thursday this week. The attention of the markets will be especially on these two important economic events.

100 bps perspective… The FOMC looks set to increase its target range for the federal funds rate by at least 75 basis points at its next meeting on July 27. The 372K increase in non-farm payrolls in June has given a confidence level to continue with rate hikes. Inflation remains high in the minds of most FOMC members as CPI inflation also jumped from 8.6% in May to 9.1% in June. Right after the inflation data, which came above the expectations for June, the majority of the market expects a 100 basis point rate hike on 27 July.

As usual, an updated Summary of Economic Forecasts will not be published at the July meeting. Therefore, the FOMC statement and Powell talk will give us the necessary signal to understand the perspectives of policy makers, not numerical predictions. Powell and his committee members will likely continue to voice their concerns about inflation.

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

The grounds for the tightening of international banks… The Bank of Canada surprised the markets by increasing the policy rate by 100 basis points. The dollar has become dominant amid fears of a global economic slowdown, and the Fed’s perspective to raise interest rates also contributes to this dominance. The weakening trend in the local currencies of many countries has the potential to increase inflation through import prices. Of course, this situation will bring import-dependent countries to a much more sensitive point. Europe comes first.

Recession concerns… The gap between 2-year and 10-year US Treasury yields is at a 22-year high. This situation still reveals the most striking recession indicators. If the recent signs of economic slowdown are to be referred to, it is very likely that the expectation of a Fed that will slow down in the broad term will come to the fore. We do not expect the Fed to stop the rate hikes at this stage, we expect the rate of interest rate hikes to slow down in the future.

Conclusion? With inflation continuing to climb faster than expected, the FOMC remains fully focused on the price stability side. Therefore, a pullback for the Fed for July 27 and the near term does not seem likely at the moment. The continuation of large rate hikes will not take a long time. The inverted yield curve reflects concerns about the US economy falling into recession. Although the increasing presence of recession indicators brings expectations that the Fed’s momentum will slow down, the Fed is expected to reduce the amount of tightening in the medium term, not in the short term.

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