Thursday, December 1 2022

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Would the U.S. Federal Reserve actually raise interest rates this month by a full point (or one hundred basis points, whichever seems the most dramatic)? The markets say very suddenly yes.

Federal funds futures odds on Wednesday were pricing in a 77% chance of a full rate hike, according to CME Group’s FedWatch tool. That would represent the largest increase since the Fed began using overnight interest rates in the 1990s.

Keep it at 100

A searing jump in the consumer price index of 9.1% – which unexpectedly beat the Dow Jones estimate of 8.8% – changed a lot minds overnight. On Tuesday, Fed Funds futures odds estimated just a 7% chance of a full interest rate coming after the Reserve Bank governors meeting on July 27. In other words, hardly anyone thought that the Fed, although determined to contain inflation, could launch its next rate hike all the way to 100. Now almost everyone does.

A one-point hike would not be the Fed’s first sudden and aggressive move. Last month, the central bank raised rates by 75 basis points, the biggest hike since 1994, despite earlier hints of a hike of just half a point. And the latest consumer price figures, released by the Bureau of Labor Statistics on Wednesday, pretty much begged for action:

  • In addition to the national rise of 9.1% in the annual cost of living recorded in June, the fastest pace since November 1981, seven metropolitan areas saw double digit inflation. So send a Get Well Soon card — or frozen gel packs wrapped around a slightly less puffy steak — to your friends in Baltimore, Miami, Houston, Seattle, Phoenix, Atlanta and Anchorage.
  • “You have to put 100 on the table for July,” said Andrew Hollenhorst, Citigroup’s chief US economist. Bloomberg. “Everyone should be pretty careful before calling peak inflation, a few months ago the peak was supposed to be 8.3%.”

At the 100th meridian: If the Fed opts for a full point hike, it will not be alone. On Wednesday, the Bank of Canada – where inflation soared to 7.7% in May – raised interest rates by one percentage point to 2.5% in a surprise move. The US rate is currently 1.5%.

It is a gas: Yes, fuel prices are still up 47% over the past year, but they’ve dropped about 38 cents per gallon over the past month. It’s your nugget of good news in a storm of much more expensive chicken nuggets.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


Former Assistant Secretary of Commerce and Policy Expert Bruce Mehlman at National Grocers Association Executive Conference and Public Policy Summit


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