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Fed could be considering 75 basis point rate hike

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Yahoo Finance Live anchors discuss reports that the Fed could be considering a 75 basis point rate hike at the FOMC meeting.

Video Transcript

BRIAN SOZZI: Much of this volatility stems from uncertainty surrounding tomorrow's announcement from the Federal Reserve on interest rates. A new report out of "The Wall Street Journal" says the Fed is now considering a larger-than-expected 75 basis point rate hike. This following a string of ultra-hot inflation reports. Let's bring in Yahoo Finance's Brian Cheung for more on this. Brian, a little bit of a surprise to the markets to say the very least.

BRIAN CHEUNG: Yeah. Well, I mean, we were just showing the probability charts, these are betting markets, the Fed funds futures markets, and this essentially places bets on where traders feel the Fed is going to go at the conclusion of their policy meeting tomorrow at 2:00 PM. And you can see right now it's essentially a done deal, about 96% I believe it is, that they feel like they're going to see that 75% basis point move at the conclusion of tomorrow's meeting.

Now, what happened, right? Because if you rewind to yesterday in the morning, it was only about 30%, and if you rewind to before the inflation report last Thursday, it was about 3%. So you're seeing a massive pivot during what's a Fed blackout period. You have all the Wall Street banks now on board saying we're calling for a 75 basis point hike.

All this has to do with "The Wall Street Journal" report that got published at 3:20 PM yesterday before market close that had the headline Fed likely to consider a 0.75 percentage point rate increase. No sourcing in the article but the reporter of that article, very close with the Fed. We know that there have been instances in the past, not necessarily during the Powell Fed, but in previous Feds where information has been slipped to the publication.

JULIE HYMAN: Disseminated.

BRIAN SOZZI: It's a trial balloon.

BRIAN CHEUNG: Disseminated. Perhaps a trial balloon. But regardless, trial balloon or not, this essentially pins them in now to a 75 basis point increase because the markets are now expecting it.

Now, I want to point out just how unusual this is. I've been covering the Fed for you know, only a few years but this is the first time I've ever seen anything like this two market days after an inflation report but two days before a policy-setting meeting. And I want to remind everyone, a day before the actual FOMC meeting began, it began this morning at 9:00 AM, this information was disseminated by "The Wall Street Journal" before that meeting even began. So this isn't necessarily the Federal Reserve getting everyone around the table before they want to not necessarily leak, but well, I mean, it really is a leak, I guess. This is perhaps Jay Powell trying to get ahead of this thing, wanting to put that information out there. But they're painting themselves into this commitment now and that's essentially probably what it's going to be at the conclusion of tomorrow's meeting.

JULIE HYMAN: Yeah. I mean-- and just to rewind a little bit, this took Sozz and I back to Jon-- the days of Jon Hilsenrath at "The Wall Street Journal."

BRIAN CHEUNG: Right.

JULIE HYMAN: Who used to be sort of-- and the Fed was--

BRIAN SOZZI: Plugged in.

JULIE HYMAN: Plugged in. He was sort of the mouthpiece of the Fed if you will, where that was the preferred leaker and disseminator of information on the part of the Fed in an era where the Fed was not quite as transparent and communicative as it is now pre you know, press conference, for example--

BRIAN CHEUNG: Yes.

JULIE HYMAN: --at most of the meetings. And so it's interesting to see this happen now. And also just to refresh people's memory, Jay Powell said the Fed was not actively considering 75 basis point increase.

BRIAN CHEUNG: Six weeks ago.

JULIE HYMAN: That was the words that he used. At the same time that the Fed also emphasized it was going to be nimble. So it's interesting now they don't want to catch the markets off-guard. So that's where this story then comes from.

BRIAN CHEUNG: Well, and this is a fascinating question of credibility here because, on one hand, you look at what the Fed has been saying for the last five or six weeks, which is we're going to do 50 basis points in June, we're going to do another 50 basis points in July, and there is a coalescence around the Committee of that happening. You remember James Bullard floating the idea of a 75 basis point hike before the May meeting, he didn't dissent in that May meeting, and then he came on air on Yahoo Finance and said I'm supportive of the 50 basis point move now. Now you have this pivot two days before the meeting, during a Fed media blackout period where they're completely changing their tone. And you do wonder, does that impact the credibility of the institution given they've been telling markets something completely different for the past five weeks.

Now, on the other hand, isn't credibility perhaps the outcome, it's not really the means to get there. The point of credibility is to get inflation down. And if you walk back a policy stance that you had five weeks ago but you manage to get inflation down because you're being more aggressive, in the long run maybe that helps you get more credibility. But look, I'm seeing notes out here from Evercore ISI scathing. I mean, the quote from this morning from Krishna Guha, "There is no systematic and credible strategy behind the 75. When the market thinks the central bank is panicking, the market panics too." So this is going to be a little bit contentious, and I think that's going to make tomorrow's press conference pretty bumpy.

BRAD SMITH: And so now people are wondering, how do they play this scenario? And there was particularly the data that came out from the BofA Global Fund Manager Survey as well, that said if the Fed goes 50 basis points in June, that equals them being behind the curve, and they're saying that they're positioning a deeper risk-off via short oil and resources. I mean, you just hear about some of the fund manager plays particularly and what could be coming even after we hear the final decision from the Fed too.

BRIAN CHEUNG: Well, let me put it this way, it's a little bit too you know, early to say exactly what the volatility is going to look like at the conclusion of the meeting but obviously, the plan or strategy to get this information perhaps out there before the actual policy meeting is a way to prepare markets, if you will, for this quote-unquote "surprise," right? That no one had expected, at least as of Thursday, or even as of yesterday, right?

Now, this is not inconsequential, right? People might be saying, well what's the difference between 25-- you know, it's a 25 basis point difference between 1/2 a percentage point and 3/4 of a percentage point, but consider that there are lots of funds that have basis trades that are in the Treasury market that didn't see this coming. Do they start to blow up?

BRIAN SOZZI: It's about people's livelihoods too. It's not-- we get so I think focused on markets as we should but the cost of owning a home might go up. It impacts main street in a huge way.

BRIAN CHEUNG: It already is. I mean, look, there is the argument that when you want to talk about borrowing costs, the Fed could have gotten away with raising interest rates by 50 basis points tomorrow but they would still be benefiting from the fact that the 10-year and the two-year and the 30-year have already risen. It's just market forces that are pushing the longer ends of the yield curve up. So you know, I think that at the end of the day, what the Federal Reserve is trying to do here if they do go by 75 basis points, which that's what it sounds like, is they want to show the world that they are very serious about getting inflation down.

Does 75 basis points tomorrow do it? No, it's going to be more than that. What's the challenge down the line if they have to at some point maybe want to kick that back to 50 basis points? That would still be hiking but imagine the message that's going to send to markets, it's going to be very noisy.

BRIAN SOZZI: Well, the challenge is not-- is when-- should we tip into a recession and they can't cut rates because inflation is still running hot. And I think that's what the market's getting worried about.