Investors are now watching to see if the Fed slows the pace of rate increases at its next meeting in September, or if strong price gains pressure the central bank to continue with super-sized hikes.
Traders saw a half-point hike at the Sept. 20-21 FOMC meeting as the most likely outcome, according to pricing earlier on Wednesday in interest-rate futures contracts. They see rates peaking around 3.4% by year-end, followed by cuts in the second quarter of 2023.
The US consumer price index rose by 9.1% in June from a year earlier, topping forecasts and hitting a fresh four-decade high. The price gains are eroding earnings and sowing discontent with the economy, creating challenges for President Joe Biden and congressional Democrats ahead of the midterm elections.
High inflation had briefly fueled speculation that the Fed would lift rates by a full percentage point this month. But those bets got dialed back after Fed officials voiced wariness and key readings on consumer expectations for future inflation were better than expected.
Central banks across the globe are engaged in a battle against surging prices. Earlier this month the Bank of Canada hiked rates by a full percentage point and the European Central Bank surprised with a larger-than-expected half-point move, its first increase in more than a decade.
This article was provided by Bloomberg News.