Soaring inflation has traders betting on the first 100-basis-point rate hike in decades

Soaring inflation has traders betting on the first 100-basis-point rate hike in decades
Paul Volcker, former Fed Chair 1979 to 1987.Bettmann / Getty Images
  • Traders' bets for a 100-basis-point rate hike this month saw big swings on Thursday, according to CME data.
  • The FedWatch tool, which is based on Fed Fund futures contract prices, saw the odds soar to 83% then dive to 45% in a few hours.

Traders scrambled Thursday to price in the odds of a 100-basis-point rate hike at the Federal Reserve's meeting later this month, following June's hot inflation reading.

According to CME's FedWatch tool, which is based on Fed Funds futures, the odds surged to 83% in the morning then dived to 45% a few hours later. By midday, traders were forecasting about a 50% probability for the historically aggressive move at the Fed's July 26-27 meeting.

The big swings came after Fed Governor Christoper Waller said Thursday he expects the central bank will back a 75-basis-point hike, adding that it would bring policy to a neutral level.

While he is open to a larger increase, he cautioned that the "market may have gotten ahead of themselves a little bit yesterday," when the consumer price index showed a 9.1% surge. "We don't want to make snap policy decision based on some knee-jerk reaction to what happened in the CPI report."

Still, if Fed Chair Jerome Powell announces a 1-percentage-point hike, it would be the largest move since Paul Volcker was Fed chairman in the 1980s. During his time at the helm, Volcker was widely credited with taming high levels of inflation with aggressive interest rate hikes, though his maneuvers put the US into a recession in 1981 to 1982.


Today, the US has been going through its hottest stretch of inflation since that same era.

The Bank of Canada led the way with its own 100-basis-point hike already this week, which was its largest move since 1998 and above the expected 75-basis-point hike.

Economist Mohamed El-Erian, for his part, said that the Fed has no choice but to remain aggressive, and that a 100-basis-point hike is not off limits.

Meanwhile, Wharton professor Jeremy Siegel said the US is past its inflation peak and expects the Fed to raise rates by 75 basis points.