Traders Put 75 Basis Point Hike at Fed Meeting Next Week Back on the Table

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By Geoffrey Smith

Investing.com -- An interest rate hike of 75 basis points is back on the table for next week's Federal Reserve meeting, after another surprisingly strong rise in U.S. consumer inflation in May.

The contract for 30-day Fed Funds futures on the CME, widely used for hedging short-term interest rate risk, fell by 13 basis points to 97.27 in the wake of the Labor Department's announcement that the consumer price index rose to a new four-decade high of 8.6%. That implies a hike of more than 50 basis points in the target range for fed funds when the central bank's policy-making committee meets on Tuesday and Wednesday. 

"Together with another strong rise in core prices raises the odds that the Fed will need to extend its series of 50bp rate hikes into the fall, and even opens the door to a larger 75bp move at next week’s FOMC meeting," Capital Economics analysts said in a note to clients.

Chair Jerome Powell had said after the Fed's last meeting that he expected half-point increases to be discussed at the next couple of meetings, and calls for more drastic action since then have largely come from outside the central bank. U.S. President Joe Biden, whose own popularity ratings have suffered along with those of his party as the cost of living has soared, said after a recent meeting with Powell that he respected the Fed's independence and expected it to bring inflation under control.

The inflation report also had a strong effect on other interest-rate products. The 2-Year Treasury yield rose 13 basis points to 2.95%, its highest since November 2018. The 10-year note yield, which is more sensitive to longer-term expectations for inflation, rose by slightly less but still traded up 7 basis points at 3.11%. The prospect of dollar interest rates remaining higher for longer, meanwhile, propelled the dollar back to its highest in over three weeks. By 10 AM ET (1400 GMT), the dollar index, which tracks the greenback against a basket of developed market currencies, was up 0.9% at 104.11.