Surprise 1.0%P Rate Hike in Canada Amid Inflation Fears... US Says "Anything Is Possible" [Fed Tightening Gains Momentum]

[Asia Economy New York=Special Correspondent Joselgina] "Everything is in play." (Raphael Bostic, President of the Federal Reserve Bank of Atlanta)

With U.S. inflation soaring past 9%, the possibility of aggressive tightening by the central bank, the Federal Reserve (Fed), has significantly increased. Despite the steep pace of rate hikes since the beginning of the year?Baby Step (0.25 percentage point increase), Big Step (0.5 percentage point increase), and Giant Step (0.75 percentage point increase)?inflation shows little sign of easing. As a result, it is now being evaluated that the Fed may have no choice but to pull out the ‘1.0 percentage point’ card for the first time since the introduction of the overnight rate in the 1990s.

◇ U.S. Price Shock... Spread of 1.0%P Rate Hike Theory

On the 13th (local time), following the release of the June Consumer Price Index (CPI), discussions about a 1.0 percentage point rate hike by the Fed have heated up on Wall Street. This is why the probability of a 1.0 percentage point hike in July, which was only 7.6% the previous day in the federal funds (FF) futures market, surged to 44% in the morning and 83% in the afternoon.

The June CPI, which surged 9.1% compared to a year ago, suggests that the peak of U.S. inflation is still far off. The core CPI, which excludes the volatile energy and food sectors, slowed to 5.9% from the previous month but remains at a high level. Experts particularly express concern over housing costs, which account for about one-third of the CPI and recorded the highest increase (5.6%) since February 1991.

Sal Guatieri of BMO Capital Markets diagnosed, "Despite the drop in gasoline prices in July, the overall inflationary trend, including housing costs, remains strong, making it difficult to expect a peak anytime soon." Nomura Securities predicted a 1.0 percentage point hike at the July Federal Open Market Committee (FOMC) regular meeting, stating, "Considering housing cost inflation, this is especially likely."

◇ "No Choice" Canada Also Takes Strong Measures

Among major advanced countries, Canada’s decision to implement a surprise 1.0 percentage point rate hike adds weight to expectations of aggressive tightening by the Fed. The Canadian central bank’s surprise 1.0 percentage point rate hike was also driven by concerns over ‘inflation entrenchment.’

This is the first time Canada has raised rates by 1.0 percentage point at once since August 1998, in response to the Asian financial crisis. Governor Tiff Macklem explained the monetary policy decision, saying, "Preemptive rate hikes are necessary because high inflation could become entrenched." Canada’s May CPI increase rate was 7.7%, lower than that of the U.S.

Ultimately, the Fed, burdened with the task of stabilizing prices, has no choice but to rely on additional tightening while maintaining hawkish rhetoric to preserve policymakers’ credibility. Raphael Bostic, President of the Federal Reserve Bank of Atlanta, told reporters on the day that when asked if a 1.0 percentage point rate hike was possible, "Everything is possible." Piper Sandler also forecasted, "Don’t be surprised if the Fed raises rates by 1.0 percentage point this month. At minimum, a 0.75 percentage point hike is expected, and 1.0 percentage point is also on the table."

Market anxiety over soaring inflation was so intense that a fake CPI report circulated overnight. Wall Street interpreted this as a sign of the market’s significant unease. Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, pointed out, "The Fed has no other choice."

◇ Biden: "Data Is Lagging"

However, some predict that the Fed, which broke its guidance just a month ago with a surprise Giant Step, will not make another sharp turn. Rather, the CPI released that day confirmed that the Fed could once again raise rates by 0.75 percentage points. Earlier, Fed Chair Jerome Powell had said that the July FOMC could discuss a 0.5 or 0.75 percentage point hike.

U.S. President Joe Biden commented on the June CPI, which surpassed 9%, saying, "Today’s figure is unacceptably high," and claimed, "The data is lagging." In a statement that day, he pointed out, "It does not properly reflect the impact of about 30 days of falling gasoline prices," and "Prices of other commodities such as wheat have also dropped sharply since this report was released."

Recently, commodity prices such as oil and grains have shown signs of downward stabilization. The U.S. national average gasoline price, which had previously surpassed $5 per gallon, fell to $4.64 on the day, down 4.7% from the June peak. The international oil price benchmark, West Texas Intermediate (WTI), dropped to around $96 per barrel.