Fed seen more aggressive, markets in turmoil after hot inflation data

SINGAPORE/NEW YORK (Reuters) -Investment banks have ramped up projections for U.S. interest rate rises following evidence that inflation remains red-hot, with several now forecasting a 75-basis-point hike this week, unsettling markets.

The Federal Reserve meets on Wednesday in the midst of heavy selling in stock and bond markets following May data showing U.S. consumer prices rising at their fastest pace since 1981. A 75 basis point hike would be the biggest since 1994.

The S&P 500 appeared on track to confirm a bear market on Monday, while a widely watched part of the Treasury yield curve inverted on fears that big Fed hikes would tip the economy into recession. [.N]

CME's FedWatch tool, based on the prices of short-term credit futures, shows about a 1/4 chance of a 75 basis point rate hike at this month's meeting and a better-than-even chance of there being at least one 75 basis point rise by next month's meeting.

"The May inflation data was so concerning that we think the Fed will react even more aggressively in moving rates 'expeditiously'," BNY Mellon (NYSE:BK) strategist John Velis said on Monday. His note forecast a 75 basis point hike on June 15, up from 50 basis points.

"We felt compelled by circumstances to change our view (and) so communicate it."

Barclays (LON:BARC) and Jefferies also forecast a 75 basis point hike for this week.

"US CPI surprised to the upside and continues to show broad and persistent price pressures," Barclays analysts said in a Sunday note. "We think the Fed probably wants to surprise markets to re-establish its inflation fighting credentials."

Standard Chartered said in a Monday note that while it expected a half-point rise this week, it did not preclude larger increases of 75 basis points or even a full percentage point.

It upgraded its forecasts for July and September to a 50 basis point and a 25 basis point increase, respectively, from previous expectations of 25 basis points in July and zero in September.

Markets have braced, too, with a selloff in short-dated Treasuries along with futures tied to the Fed policy rate extending in Asia on Monday. Yields on the two-year Treasury note are at their highest since late 2007. [US/]

Signs of an economic slowdown - including a survey last week showing U.S. consumer sentiment plunged to a record low in early June - are not enough for the U.S. central bank to ease up in its fight against inflation, said Standard Chartered (OTC:SCBFF).

For Rabobank, the risk of 'stagflation' - a period of weak growth and high inflation last seen in the 1970s - could give way to the threat of 'incession', a combination of inflation and recession, it said in a research note on Sunday.