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Friday's CPI data for May was a game-changing number, putting paid to the latest theory that inflation was 'peaking', brought to you by the same folks that claimed inflation was 'transitory.'

In fact, with prices of energy, housing and wages still rising, a top may still be months away.

In the days since, the bond market has collectively concluded that the Fed has a taller task at hand to stabilize prices, aggressively pushing the theoretical terminal Funds rate to near 4% from around 3% discounted in late May.

The frenzy was exacerbated Monday by a Fed mouthpiece at the Wall St Journal hinting that the FOMC was likely to consider raising rates by 75 bps on Wednesday despite having telegraphed a 50 bps move just a little more than a week ago.

Smelling a leak, the futures market almost instantly priced a 90+% chance of that outcome tomorrow and a year-end Funds rate at 3.6475%. (See chart below)

That implies at least 275 basis points of tightening over the five remaining meetings in 2022, a far cry from the recent suggestion made by Atlanta Fed President Bostic that a 'pause' in September might be appropriate.

It's easy to criticize in hindsight, but the Fed was so concerned with not repeating the 2013 taper tantrum and upsetting financial markets that it slow-walked forward guidance for most of the past year and downplayed what was staring them in the face.

Now they are being forced to slam on the brakes, hoping to unwind the bubble created by more than a decade of artificially low yields. Asset markets can, and will likely, overshoot as that process plays out.


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