A Fed Rate Hike of 75 Basis Points Is a Done Deal for Traders

(Bloomberg) — Traders are betting the Federal Reserve will raise rates by three quarters of a percentage point at least once in its next three meetings to cool the hottest inflation in four decades.

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Money markets are pricing 175 basis points by its September decision, implying two half-point and one 75 basis points hike, according to interest rate swaps tied to FOMC policy outcome dates. That’s upgraded from only fully pricing half-point hikes previously. The last 75 basis-point hike by the Fed was made in November 1994.

The shift in tightening bets after Friday’s inflation numbers has sparked a global equity selloff and pushed the US S&P 500 closer to a bear market. A closely-watched part of the US yield curve inverted Monday, reflecting concern that aggressive rate hikes will push the economy into a recession.

All eyes will be on this week’s Fed statement and Chair Jerome Powell’s post-meeting press conference, where policy makers’ characterization of inflation and long-term forecasts for the fed funds target — the so-called dot plot — will be critical.

“The high inflation print has put a dent to the peak inflation (and peak Fed hawkishness narrative),” Mohit Kumar, an interest rate strategist at Jefferies International Ltd, wrote in a note to clients on Monday. “From a Fed perspective, the question is whether they will need to respond even more forcefully with a 75bp at the June meeting.”

US Treasuries and European bonds fell Monday.

The yield on the two-year US note, which is most sensitive to rate hikes, jumped as much as 18 basis points to 3.25%, its highest since December 2007. That saw the curve between two and 10-years invert for the first time since April.

(Updates with comment from strategist, additional context, starting in third paragraph)