Investors on Wednesday priced in a 70 percent probability of an interest rate increase at the end of October by the Federal Reserve, driven by accelerating economic activity, rising energy costs, and hawkish commentary from central bank officials.
Energy rally and survey data
Brent crude rose 2 percent on Wednesday to surpass $101 per barrel, while the average US diesel price exceeded $6.50 per gallon. Austan Goolsbee, President of the Federal Reserve Bank of Chicago, warned that the central bank should not automatically assume that inflationary pressure stemming from oil prices will dissipate quickly on its own.
Stronger business activity compounded those price pressures. S&P Global’s flash survey for September indicated that the US composite business activity index rose to its highest level since July 2021, with input prices paid by companies hitting a near four-year high.
Bond yields hit multiyear highs
The policy target range reached 3.75 percent to 4 percent last week, and 16 out of 18 Fed policymakers projected at least one more rate hike this year. Fed Governor Michael Barr stated that risks to achieving the inflation target have increased while risks to the labor market have moderated, adding that further rate hikes may be necessary to bring down inflation in a timely manner.
Debt markets reacted sharply across maturities. The 5-year US Treasury yield reached a 19-year high following weak demand at auction. The 10-year Treasury yield exceeded 5 percent, a level not seen since 2007. Average 30-year US mortgage rates reached 7.12 percent.
The policy decision precedes the US midterm elections set for November 3.
Related: Sucor sees 60% chance of Fed rate hike in September · Credit Agricole sees Polish rate hike to 4.00%
Source: Federal Reserve
