LIVE MARKETS-Fed calculus: CPI and rate hike bets

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FED CALCULUS: CPI AND RATE HIKE BETS

Wednesday's hotter-than-expected CPI print had markets recalibrating their expectations regarding Federal Reserve monetary policy.

There's currently a 39.3% probability that the central bank will implement a 25-basis-point rate hike this month, up from 22.1% on Tuesday, according to CME's FedWatch tool.

The Fed's following meeting, in December, is largely expected to culminate in a 25-bp increase (58.5%), with a growing number of bets in favor of a supersize 50-bp rate hike (35.3%).

"(The Fed is) not going to do October partly for political reasons," Jay Hatfield, CEO and portfolio manager at InfraCap in New York, tells Reuters. "They're going to do one in December, almost for sure."

"The dot plot says one increase and (New York Fed President John) Williams, who is arguably the second-most important person on the Fed, said that probably just one more increase is appropriate."

Separately, headline CPI has been coasting well above wage growth for the last six months. What does that imply for an economy that derives 70% of its growth from the consumer?

"We're projecting below trend growth next year for precisely that reason," Hatfield adds. "The consumer is not going to just implode unless there's mass unemployment, but there's every reason to believe that consumption will be tempered, and that will feed into below trend growth, like below 2% next year," Hatfield says.

"And that's precisely why you should not raise rates when oil prices are higher; because they're already dampening economic growth."

(Stephen Culp)

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