Markets, Analysts Increasingly See a Full Percentage Point Rate Increase at Next Fed Meeting

 WASHINGTON–Many analysts have been forecasting a 75-basis-point increase in the Fed Funds rate when the Federal Open Markets Committee meets July 26-27, but now the markets are predicting it could be a full percentage point increase.

The forecasts are coming after the latest Labor Department’s June Consumer Index report showed inflation in June jumped a record 9.1%, the biggest monthly increase since November 1981.

“Fed funds futures for July immediately rose to 81 basis points, meaning investors were pricing in 0.81% in rate hikes from the Fed on July 27. And by the afternoon, market expectations continued to grow, with the fed funds futures pricing in 93 basis points of a hike in July, according to BMO,” CNBC reported. “The market had previously anticipated a rate hike of 0.75 percentage points, but the high reading on the July contract indicates many investors are bracing for a 1% hike. That would be extremely aggressive on top of June’s three-quarter point hike, the largest increase since 1994.”

The fed funds rate range target is currently 1.5%-1.75%.

Edging Higher

Global rate pressure is certainly one reason expectations have kept edging higher, as well as comments from a Fed official.

Andrew Brenner, head of international fixed income at National Alliance Securities, added in comments to CNBC, “You had the Bank of Canada, out of nowhere, went from the solid 75 basis point expectation, which was already high ... and they did 100 basis points.”

Fed President Adds Fuel

Brenner further noted comments from Atlanta Fed President Raphael Bostic also helped send expectations higher, after he said the latest CPI report is a “concern” and everything is “in play.”

Ben Jeffery, rate strategist at BMO, told CNBC the market was now pricing for a fed funds rate of 2.51% in July, but October futures also pointed to a bigger hike in September.

The September contract was priced for fed funds at 3.23% by October.

As CUToday.info reported here, CUNA is forecasting the Fed funds rate will be 3.15% at year-end 2022 and 3.25% at year-end 2023. 

Mortgage Rates

Meanwhile, mortgage rates are again raising, after posting a drop last week.

The 30-year fixed-rate mortgage averaged 5.51% in the week ending July 14, up from 5.3% the week before, according to Freddie Mac. That mark is significantly above where rates stood at the same time in 2021, when the 30-year stood at 2.88%.