US | A larger 75 bps hike is now likely

Summary

We now expect more rate hike front-loading as the FOMC turns more hawkish following persistently high inflation readings from last week.

Key points

• Key points:
• During the intermeeting period and before Fed officials began their blackout period on June 4, they continued to signal that a series of 50 bps hikes were coming and that it was unlikely that the Fed would be taking a break from its current rate hiking cycle anytime soon.
• What changed? Consumer prices surged in May. Headline CPI was up 1.0% MoM, reaching 8.6% YoY, a fresh four-decade high (the highest since December 1981), while the annual core inflation rate eased less than expected (to 6.0% YoY) after also rising strongly in May (0.6% MoM sa).
• What else changed? A report from the WSJ (see) seems to hint that the Fed is ready to hike 75 bps tomorrow. We now expect the Fed to take advantage of this sharp change in expectations to more aggressively front-load rate hikes until inflation starts to show clear signs of easing.
• Along with its monetary policy decision, the Fed will also release updated economic projections by meeting participants, including their assessment for the appropriate fed funds rate. The dot plot will likely signal more rate hike front-loading and a higher terminal rate.

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