Fed to go 75bps? 100bps?


Two developments since the May CPI report reinforce the case for a more hawkish FOMC meeting on Wednesday, in our view. First, the startling rise in the longer-term inflation expectations in the University of Michigan’s consumer sentiment survey could imply a higher level of the nominal neutral interest rate. Second, according to the WSJ this afternoon, the Committee will not go into tomorrow’s two-day meeting constrained by their previous guidance that a 50bp meeting “would likely be appropriate.” As such, we now look for a 75bp hike on Wednesday. To the extent today’s report about Fed officials considering “surprising markets with a larger-than-expected 0.75pp interest rate increase” helps reinforce expectations for such a move, one might wonder whether the true surprise would actually be hiking 100bp, something we think is a non-trivial risk. After this week we look for two more 50bp hikes in July and September before the Committee slows to a 25bp hike per-meeting pace until reaching terminal funds at 3.25-3.50% early next year.

Standard Chartered is even more hawkish:

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