Hot inflation fuels bets on supersized Fed rate hike

July 13 (Reuters) – The U.S. Federal Reserve is seen ramping up its battle with 40-year high inflation with a supersized 100 basis points rate hike this month after a grim inflation report showed price pressures accelerating.

“Everything is in play,” Atlanta Fed President Raphael Bostic told reporters in Florida, when asked about the possibility.

While he said he still needed to study the “nuts and bolts” of the report, “today’s numbers suggest the trajectory is not moving in a positive way. … How much I need to adapt is really the next question.”

Bostic has been among the bevy of central bankers in recent weeks signaling support for a second straight 75 basis points rate increase at their upcoming policy meeting on July 26-27.

But after Wednesday data from the Labor Department showed rising costs of gas, food and rent drove the consumer price index (CPI) up 9.1% last month from a year earlier, views may be evolving. read more

Traders of futures tied to the Fed’s policy rate are betting they already have: They are now pricing in a nearly 80% probability of a full percentage-point rise at the coming meeting, according to an analysis of the contracts by CME Group.

That was up from about a one-in-nine chance seen before the report, which also showed core inflation, excluding more volatile food and energy prices, accelerated on a monthly basis.

The expectation that the Fed will get more aggressive to stop inflation is also raising alarm that policymakers will go too far and crater economic growth as well.

Yields on longer-term Treasuries fell, making the so-called yield-curve inversion the most pronounced it has been in more than 20 years.

An inversion is seen as a harbinger of a downturn because it suggests investors are banking on a growth slowdown. Rate futures trading suggests investors anticipate the Fed may need to start cutting interest rates again by the middle of next year.

“The June CPI report was a straight up disaster for the Fed,” wrote SGH Macro Advisors’ Tim Duy. “The deepening yield curve inversion is screaming recession, and the Fed has made clear it prioritizes restoring price stability over all else.”

Other central banks are also feeling the heat with the Bank of Canada on Wednesday raising its benchmark interest rate by 100 basis points in a bid to tame soaring inflation, a surprise move and its biggest in nearly 24 years. read more

‘RECESSION THREAT IS RISING’

Fed Chair Jerome Powell and other policymakers have become increasingly worried that business and consumer expectations of a torrid rate of future price increases could become entrenched. They have shown they will react swiftly when data worsens.

Ahead of its prior meeting in June, the Fed telegraphed a 50 basis points move before pivoting at the last minute to a three quarter point hike…