Soaring inflation fuels bets on sharper Fed rate hikes

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Fed policymakers had already all but promised half-point interest rate hikes at their meeting next week and again in late July, following May’s half-point hike and the start of balance sheet reductions this month. That would be more policy tightening in the space of three months than the Fed did in all of 2018.

On Friday, traders of futures tied to the Fed policy rate began pricing in an even bolder path after U.S. Labor Department data showed sharply higher food and record gas prices pushed the consumer price index (CPI) up 8.6% last month from a year earlier. A separate University of Michigan survey showed longer-term inflation expectations rising to their highest since 2008.

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Prices of Fed funds futures contracts now reflect better-than-even odds of a 75-basis-point rate hike by July, with a one-in-four chance of that occurring next week — up from one-in-20 before the inflation report — and a policy rate in at least the 3.25%-3.5% range at year end.

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