The move happened in a week. Markets now put the probability of a quarter-point increase at Wednesday's Federal Open Market Committee meeting at 34.2 percent, up from 12.8 percent seven days earlier, on CME Group's FedWatch measure [1].
The expectation inside the building is not consensus but conflict. Oscar Munoz, head of US economics at TD Securities, expects two hawkish dissents: 'The July FOMC will be a family feud,' he said, 'just as Kevin Warsh intended' [1]. The phrase is the chair's own - Warsh has used 'family fight' repeatedly since his April nomination hearing [1].
What makes the timing strange is the data. June CPI, published July 14, came in at 3.5 percent year over year - the first decline in five months, down from 4.2 percent in May and below the 3.8 percent expected [2]. Core fell to 2.6 percent from 2.9, and the monthly reading was negative, at minus 0.4 percent [2].
On the other side of the mandate, June payrolls added 57,000 jobs, well below expectations, with unemployment at 4.2 percent [3]. The funds target has sat at 3.50 to 3.75 percent all year, and the June meeting split evenly - nine of eighteen participants for a hold or cut, nine for a hike before year end [3].
There is a real argument for the hawks, and it deserves stating. Energy is still running at 15.7 percent year over year and gasoline at 26.7 percent [2], and the New York Fed's July survey put one-year inflation expectations at 3.7 percent [3]. Expectations, once they move, are hard to move back.
The difficulty is that what is pushing energy prices is a war in the Gulf, and the federal funds rate does not reopen the Strait of Hormuz. What it does reach is the mortgage, which Freddie Mac put at 6.58 percent on July 23 [4].
