Will The Fed Pull The Trigger On A Pair Of Three-Quarter Point Hikes?

A week ago the odds of a three-quarter point hike were just 2.1% Yesterday they were 23.2%. Today they are 95.5%

Rate hike odds from CME Fedwatch

 

What Happened?

That's an enormous jump from 23.2% yesterday to 95.5% today.

The jump on June 10 from June 6 is understandable given the horrific CPI report. But that only took the odds to 23.2%. 

Given this is a Fed quiet period it's not due to official Fed yapping. A leak? JPMorgan yapping? 

Regardless, here we are at +0.75 percentage points with the Fed having penciled in +0.50 percentage points. 
 

Target Rates Probabilities for July 

Rate hike odds from CME Fedwatch

Looking ahead, the market bumped up the odds of a 75 basis point hike in July as well. 

Let's look even further ahead.
 

Target Rate Probabilities December

Rate hike odds from CME Fedwatch

The median expectation is for the Fed Funds rate to be 3.75-4.00% in December.

Wow. It will be massive stagflation and stock market carnage if that is even in the ballpark. 
 

Over Twenty Million Households Struggle to Pay Energy Bills

Meanwhile, Over Twenty Million Households Struggle to Pay Energy Bills, and it will get worse. 

If we even get to 3.0% I think the Fed will already overshot neutral. 4.0% could start a second "Great Recession". 
 

Where's Neutral? 

It is a mistake to look at the CPI and think that's where neutral is.

Once the 2008 housing bust started, then factoring home prices into the CPI, neutral probably was close to 0%.

That is what happens when bubbles pop.

— Mike "Mish" Shedlock (@MishGEA) April 20, 2022

 

In Search of Neutral

For discussion of "neutral" please see The Fed Searches For the Neutral Interest Rate, Where the Heck Is It?

Based on the CPI and Fed recent talk, I now expect that rarest of rare Fed policy error, tightening too much.