The prospect of prices staying high is exactly what the Federal Reserve does not need as it meets this week, with markets now 86% priced for a hike of 25 basis points on Wednesday, the first rise since mid-2023. 0#USDIRPR
Most of the major U.S. investment houses, including Goldman Sachs and JPMorgan, switched to a hike on Friday, with even Citi shifting from a long-standing call for cuts to concede one rate rise was likely this week.
Investors see this as a test of the Fed's credibility under Chair Kevin Warsh, though it's likely to draw the ire of President Trump who continues to make the novel argument that the U.S. should have the lowest rates in the world.
Such is the concern about inflation that a steady rate decision would likely see longer-dated bond yields rise further, with the 10-year already just a whisker from the psychological 5.0% bulwark. Assuming the Fed does hike, the focus will switch to the dot plots to gauge the chance of further moves and to Warsh's media conference.
Investors know the Fed rarely ever just hikes once, so futures are pricing in around 90 basis points of tightening by the second half of next year.
Markets also imply around a 76% chance the Bank of Japan will raise its rates by 25 basis points to 1.25% on Friday, and likely sound hawkish on further tightening if only to shore up the yen. 0#JPYIRPR
The Bank of England meets on Thursday and markets imply only a 25% chance of a hike, though the decision is again likely to be a split one. 0#GBPIRPR
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