MUFG Research discusses the speculation for a larger 75bps rate hike at tomorrow's FOMC June policy meeting.
"Market participants now expect the Fed to deliver even more front-loaded tightening and to lift rates to an even higher level to combat elevated inflation which raises the risk of a hard landing for the US economy. Those expectations for more aggressive Fed tightening have been reinforced further overnight by reports in both the WSJ and NYT suggesting that the Fed could surprise the market by delivering a 75bps hike this week. The reports have prompted market participants to almost fully price in a 75bps hike this week," MUFG notes.
"The terminal policy rate is now seen at just over 4.00% by the middle of next year. By delivering a series of 75bps hikes the Fed would be sending a strong signal that it is determined to bring down inflation and at the same time it would add to concerns that the Fed will trigger a sharper slowdown for the US economy. Overall the fundamentals developments will continue to encourage an even stronger US dollar in the near-term unless the WSJ and NYT reports prove misleading," MUFG adds.