Central Banks Prepare for Back-to-Back Rate Hikes Amid High Inflation Expectations

The markets are bracing for back-to-back interest rate hikes from the Bank of Japan and the Federal Reserve this week, with odds topping 90% that both central banks will raise rates by 0.25%.

The probability of a 0.25% rate hike from the Federal Open Market Committee (FOMC) stands at 92.3%, according to CME FedWatch, and Bloomberg analysis shows that when market-implied odds exceed 90%, the Federal Reserve has raised rates with almost no exceptions.

Rising crude oil and gasoline prices have fueled higher inflation expectations, leading to increased rate hike expectations. However, experts warn that raising interest rates comes with side effects such as slower economic growth, pressure on equity markets, and softening labor market conditions.

Alex Cohen, a foreign exchange strategist at Bank of America (BAC), noted that 'there is virtually no precedent for holding off at a stage when a rate hike is roughly 90% priced in.'