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Traders are talking about chance of between-meetings rate hike by Fed in August, if inflation fails to ease

  • A hike in August would be rare move by the Fed

By: Vivien Lou Chen

It’s a long stretch of time between Wednesday’s widely anticipated rate decision by Federal Reserve policy makers and their next scheduled meeting on Sept. 20-21. And that alone has some traders thinking about the potential for a rare intermeeting rate hike in August, if inflation shows no signs of easing.

Intermeeting moves are not unprecedented, and the idea of a hike between meetings has been floated since early this year as U.S. inflation readings continued to come in hot. The last time the Fed hiked rates between meetings was in April 1994, though the central bank has delivered an emergency between-meetings cut to its main rate about seven times, and to its discount rate one time, between 1998 and 2020, according to Bloomberg News.

Interestingly, traders are discussing among themselves the idea of an intermeeting hike at the same time that many in the financial market have been of the mind that inflation has likely peaked and that the Fed could start cutting rates next year. However, the actual consumer-price index report hasn’t shown any signs of a let-up in price gains, with June’s headline annual inflation rate hitting 9.1%, an almost 41-year high.

“The reason that the idea of an intermeeting hike in August has picked up some momentum is that it is a long time between now and the next meeting,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York. “Anything is possible, and I certainly wouldn’t rule it out. I would expect Fed Chairman Jerome Powell to be asked about it at his post-meeting press conference later today.”

Fed officials are widely expected to deliver their second 75 basis point rate hike in row through a statement released at 2 p.m. Eastern time — which would take the fed funds rate target to between 2.25% and 2.5%, from its current level between 1.5% and 1.75%.

The bar for getting to an August rate hike would be if consumer price index readings, most notably the month-over-month measures and core gauges which exclude volatile food and energy items, continue to come in where they are now or the trajectory moves higher, Faranello said via phone.

August is the time when policy makers typically convene for their annual symposium in Jackson Hole, Wyo., an event that can sometimes be used to signal major shifts in officials’ thinking. This year’s symposium will be held from Aug. 25 to 27.

Trader Tom di Galoma of Seaport Global Holdings in Greenwich, Conn., said “chatter” about an August hike was taking place “within high-frequency-trader chats.”

Ahead of Wednesday’s Fed rate decision, all three U.S. stock indexes DJIA, 0.21% SPX, +1.26% COMP, +2.50% were broadly higher. Meanwhile, Treasury yields held relatively steady, although the widely followed spread between 2- and 10-year rates narrowed to minus 31 basis points, a worrisome sign of the economic outlook.