Surprise Rate Hike Possible Next Week, Chief Economist Warns

Nearly two-thirds of investors expect the Federal Reserve to raise interest rates by September, but one chief economist believes it could happen sooner.

Neil Dutta, the chief economist at Renaissance Macro Research, thinks a surprise hike in rates is possible at the Fed's meeting next week. He points out that markets are already pricing in a 66% chance of no rate change in July and only a 57% chance of a hike in September.

Dutta argues that raising rates now would give the Fed 'future flexibility' and allow it to demonstrate control over its policy decisions. He notes that Fed Chair Kevin Warsh has emphasized the need to fight inflation, and Dutta believes that a rate increase now would be more effective than waiting until September.

The current fed funds rate is in the 3.5%-3.75% range. Inflation remains above the Fed's target of 2%, at 3.5% in June. Brent crude prices rose to over $100 a barrel for the first time since May, pushing 10-year yields up to 4.7%. Dutta points out that rising oil prices will continue to impact service costs.