Fed doubts disturb markets after record US inflation

SINGAPORE/NEW YORK, June 13 (Reuters) – Several investment banks upgraded their forecasts for U.S. interest rate hikes following confirmation of the strength of inflation, and some are now expecting an uptick. by 75 basis points as of this week, which is destabilizing the financial markets.

The Federal Reserve monetary policy committee meets on Tuesday and Wednesday, less than a week after the announcement of a new acceleration in prices in the United States, inflation having reached in May its highest level since 1981 .

A 75 basis point hike in the federal funds rate target on Wednesday would be the first of this magnitude since 1994.

Wall Street, the Standard & Poor’s 500 index lost 2.61% at the start of Monday’s session, below 3,800 points, and was heading towards a “bear market” situation, i.e. a level 20% below its closing record for 3 January.

On the bond market, the beginning of the day was marked by a new inversion of the yield curve, that of the two-year American Treasury bills briefly exceeding the ten-year mark, a sign that some investors fear to see an accelerated rise in rates cause a recession.

CME Group’s FedWatch Barometer, which relies on futures levels in the credit market, now reflects about a quarter chance of a 75 basis point rate hike on Wednesday and an even higher chance an additional increase of at least 75 points at the July meeting.

“STAGFLATION” OR “INCESSION”?

“May’s inflation numbers are so worrying that we think the Fed will react even more aggressively with ‘rush’ rate changes,” BNY Mellon strategist John Vels said in a Monday note. expect an increase of 75 basis points on Wednesday, against 50 points previously.

“We felt compelled by circumstances to change our forecasts,” he adds.

Barclays and Jefferies also expect a three-quarter point hike in the Fed Funds rate target on Wednesday.

“The US consumer price index surprised on the upside and continues to reflect broad and persistent price pressures,” Barclays analysts wrote in a note dated Sunday. “We think the Fed will probably want to surprise the markets to restore its inflation-fighting credibility.”

For its part, Standard Chartered said to expect a rise of half a point this week but does not completely exclude an increase of 75 or even 100 basis points.

The bank has revised upwards its forecasts for July and September: it is betting on increases of 50 and 25 points respectively, against 25 and zero previously.

For Standard Chartered, the signs of an economic slowdown, among which is the historical low of the consumer confidence index of the University of Michigan, are not enough to dissuade the Fed from stepping up its offensive against the ‘inflation.

Rabobank, for its part, judges in a note published on Sunday that the risk of “stagflation” (a period combining low growth and high inflation) could give way to “incession”, or a conjunction between inflation and recession.

(Report Tom Westbrook and Davide Barbuscia, French version Marc Angrand)

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