For many months the Fed feared raising interest rates by 0.25%, as inflation is “transient” and the economy needs to be supported. After he had no choice, he finally raised the interest rate by a quarter of a percent, but in the end ruled out the possibility of a 0.5% increase, which he was forced to do in the following month. The interest rate of 0.75% was also ruled out sweepingly but came faster than expected when Fed raised the interest rate at this rate for the first time since 1994. Are we on the way to a 1% increase in light of the shocking inflation data released today?
Inflation is again breaking 40-year highs when in June there was an annual inflation rate of 9.1%. The figure boosted estimates to a 1% increase at the next Fed meeting. Now the market estimates are that the probability of such an increase is more than 50%, an increase of 7.6% compared to yesterday. Many traders are still expecting a “only” 0.75% increase in the July 27 decision, but there are hardly any left expecting a 0.5% increase.
At the same time, it should be remembered that the most significant component of the high inflation in the last month is energy prices, but these have moderated in recent weeks and are expected to affect the next inflation figure, as US President Joe Biden estimated today during his visit to Israel. At the same time an increase of less than 0.75% would only be in the unlikely scenario that the economic data that would flow in the next two weeks until the Fed decision would see a sharp and sudden halt to the US economy.
In the event that a 1% increase is indeed made in the next meeting, this will be the second case in the world. Last week the Bank of Canada raised interest rates by 1% compared to market expectations for a 0.75% increase.
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