(Bloomberg) -- Traders are betting the Federal Reserve will raise rates by three quarters of a percentage point at least once in its next three meetings to cool the hottest inflation in four decades.
Money markets are pricing 175 basis points by its September decision, implying two half-point and one 75 basis points hike, according to interest rate swaps tied to FOMC policy outcome dates. That’s upgraded from only fully pricing half-point hikes previously. The last 75 basis-point hike by the Fed was made in November 1994.
The shift in tightening bets after Friday’s inflation numbers has sparked a global equity selloff and pushed the US S&P 500 closer to a bear market. A closely-watched part of the US yield curve inverted Monday, reflecting concern that aggressive rate hikes will push the economy into a recession.
All eyes will be on this week’s Fed statement and Chair Jerome Powell’s post-meeting press conference, where policy makers’ characterization of inflation and long-term forecasts for the fed funds target -- the so-called dot plot -- will be critical.
“The high inflation print has put a dent to the peak inflation (and peak Fed hawkishness narrative),” Mohit Kumar, an interest rate strategist at Jefferies International Ltd, wrote in a note to clients on Monday. “From a Fed perspective, the question is whether they will need to respond even more forcefully with a 75bp at the June meeting.”
US Treasuries and European bonds fell Monday.
The yield on the two-year US note, which is most sensitive to rate hikes, jumped as much as 18 basis points to 3.25%, its highest since December 2007. That saw the curve between two and 10-years invert for the first time since April.