Core Inflation Jumps to 40-Year High, Sending Fed Rate-Hike Bets Soaring
Core Inflation Jumps to 40-Year High, Sending Fed Rate-Hike Bets Soaring

By Tom Ozimek

Hotter-than-expected inflation data, including the so-called “core” measure of inflation surging to a fresh 40-year high, have sparked a sharp upward revision to investor expectations for how high the Fed will hike rates as it struggles to quell price pressures.

Government data released on Oct. 13 showed that the annual “headline” rate of inflation edged down from 8.3 percent in August to 8.2 percent in September.

Core inflation, which strips out the volatile categories of food and energy, jumped from an annual 6.3 percent in August to 6.6 percent in September, a new four-decade high.

Both inflation gauges came in hotter than markets expected with the data prompting investors to raise their bets for Fed rate hikes.

Fed Funds futures contracts are now pricing in a 97-percent chance of a 75-basis point interest rate hike when U.S. central bank policymakers meet in November. A day earlier, those odds stood at 85 percent, while a month ago, the probability for a three-quarter point rise was about 50 percent.

After the inflation data was released, investors also began pricing in about a three percent chance for an even bigger 100-basis point hike.

Besides boosting the odds of a bigger rate hike at the Fed’s next meeting, investors have also raised their bets on the terminal Fed Funds rate, meaning how high rates will go before the Fed hits pause.

“The expected peak Fed funds rate is near 4.9 [percent] as the higher-than-expected #CPI report ratcheted up rate hike expectations,” said Kathy Jones, Chief Fixed Income Strategist at Schwab Center for Financial Research, in a post on Twitter.

Bankrate Senior Economic Analyst Mark Hamrick told The Epoch Times in an emailed statement that the Fed is sure to double down on aggressive rate hikes in the face of the hot inflation numbers.

“The Federal Reserve continues to see a bright green light with respect to future interest rate increases,” he said. “Based on the latest snapshots of inflation, they believe the target range for the federal funds rate must go higher from here. There’s no pivot yet in sight, only a push to higher ground.”

House Republicans said in a post on Twitter that they expect more upside for inflation and blamed the Biden administration for soaring prices.

“Inflation has NOT peaked it continues to surge because of [President] Joe Biden and House Democrats’ out-of-control spending,” they wrote.

Wall Street opened sharply lower after the inflation data was released.

At the opening bell, the Dow Jones Industrial Average fell 455.0 points, or 1.56 percent, to 28755.83. The S&P 500 fell 56.7 points, or 1.58 percent, to 3520.3, while the Nasdaq dropped 285.3 points, or 2.74 percent, to 10131.816 at the opening bell.

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