‘Compelled by circumstances’: Some banks forecast 75-bp Fed hike

REUTERS

SINGAPORE  — Investment banks have ramped up projections for US interest rate rises following a hotter-than-expected inflation reading, with several now forecasting a 75-basis-point (bp) hike this week.

The US Federal Reserve meets on Wednesday in the midst of heavy selling in stock and bond markets following May data showing the US consumer price index (CPI) rising at its fastest pace since 1981.

A 75-bp hike would be the biggest since 1994.

CME’s FedWatch tool, based on the prices of short-term credit futures, shows about a 1/4 chance of a 75-bp rate hike at this month’s meeting and a better-than-even chance of there being at least one 75 bp hike 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 strategist John Velis said on Monday. His note forecast a 75-bp hike on June 15, up from 50 bps.

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

Barclays and Jefferies also forecast a 75-bp 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.”

Markets have braced, too, with a sell-off 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. — Reuters

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