Wall Street braces for risk of even bigger Fed rate hike after inflation report
Hotter-than-expected inflation numbers released by the US government on Tuesday have Wall Street girding for the possibility of what many had thought unthinkable — a massive, 100-basis-point rate hike at the Federal Reserve’s next policy meeting.
The CME FedWatch Tool, which analyzes the probability of interest rate movements before Fed meetings, indicated there was a 32% probability of a rate increase of 100 basis points — after the odds were at 0% on Monday.
The odds of a 75-basis-point increase plummeted to 68% from 91% on Monday. A 50-basis-point rate hike, which had a 9% chance on Monday, fell to 0%.
The Fed’s next policy meeting is scheduled for Sept. 20-21. The rate is at 2.25% to 2.50% after the Fed imposed hikes of 75 basis points at it last two meetings.
“Markets underappreciate just how entrenched US inflation has become and the magnitude of response that will likely be required from the Fed to dislodge it,” economists for Japanese financial company Nomura wrote in a note in which they also predicted the Fed will need to lift its policy rate to 4.5%-4.75% by February.
Consumer prices surged 8.3% in August compared with a year earlier — down from 8.5% in July but still higher than anticipated.
The CPI’s food index rose 11.4%, the largest year-over-year increase since May 1979.
In the past month alone, food prices jumped 0.8%.
Housing, medical care, new cars and home furnishings were also more expensive.
In June, inflation reached a four-decade high of 9.1%.
In the 12 months ending in August, core prices jumped 6.3%, up from 5.9% in July. Rents, medical care services and new cars all grew more expensive in August.
Investors on Wall Street ran for cover following the release of the federal government’s higher-than-expected inflation report.
The Dow Jones Industrial Average plunged nearly 1,300 points at the New York Stock Exchange while the tech-heavy Nasdaq index dropped by 632 points, or 5.2%.
The S&P 500 tumbled by more than 4%.
