Fed Set to Raise Rates in July as US Inflation Accelerates to 3.8%
The April US Consumer Price Index surged to its highest since May 2023, while producer prices jumped 6%. The futures market now prices in a Fed rate hike at the next meeting.
3.8%. The April US Consumer Price Index just posted a number markets hoped never to see again. The last time CPI climbed this high was May 2023 — and back then the Fed was still tightening aggressively. Now, rate futures imply a 68% probability of a hike at the July meeting. The soft landing is off the table.
Fed Chair Jerome Powell spent the last six months convincing everyone that inflation was "transitory but manageable." The April report shattered that logic. Core inflation, excluding food and energy, accelerated to 4.1%. Producer prices jumped 6% year-over-year — the highest since November 2022. The goods deflation that had been saving the statistics all last year is over.
The Energy Tail Wagging the Dog
The main driver is the blockade of the Strait of Hormuz and oil at $111 per barrel. Gasoline in California already costs $5.80 per gallon. Diesel for trucks is up 22% since February. But the problem goes deeper than the pump.
Energy has seeped into every sector. Airfares soared 8.7% in a single month — carriers are passing fuel costs to passengers. Transportation services rose 1.8% in April alone. Construction materials are climbing in tandem with petrochemicals. Even a haircut at a New York barbershop now costs $4 more than in January — rent, electricity, logistics, all tied together.
Erica McEntee, head of the Bureau of Labor Statistics, acknowledged at a briefing that the energy component of CPI drove 60% of the monthly increase. The remaining 40% came from services and housing, which are accelerating on their own, without any oil.
Powell Trapped
The Fed faces a classic 2022 dilemma, only worse. Back then, inflation came from overheated demand: too much money chasing too few goods. Now, a supply shock is layered on top of an already hot labor market. Unemployment holds at 3.7%. Private-sector wages are growing at 4.4% annually. People keep spending, even when prices bite.
A 25-basis-point rate hike in July would push the rate to 5.5–5.75% — a level not seen since 2001. The problem is that the rate cannot fix the Strait of Hormuz. It won't make the IRGC open shipping lanes or bring down oil prices. It will hit domestic demand without solving the external problem.
This is the classic stagflation scenario the Fed has feared for the past two years. Growth is slowing — GDP in the first quarter showed anemic 1.2% — while prices keep soaring. Five-year inflation expectations, measured through swaps, have reached 2.9%. They haven't been this high since 2004.
Blood in the Bond Market
The yield on two-year Treasuries — the most Fed-policy-sensitive indicator — broke through 5.1%. The ten-year trades at 4.85%. The thirty-year shot to 5.89%. The yield curve remains inverted, but the nature of the inversion has changed: previously, the market expected a recession and rate cuts; now it expects both a hike and a recession simultaneously.
US mortgage rates have crossed 7.8% for a 30-year loan. The housing market is frozen. Existing home sales fell 4.3% in April. Builders in Texas and Florida have started offering discounts of up to 10% — unthinkable just six months ago.
Corporate debt is also cracking. Spreads on high-yield bonds have widened to 450 basis points. Companies rated CCC, which barely managed to refinance during the low-rate era, now pay 11–13% on new loans. Bankruptcies in energy-intensive sectors — chemicals, transportation, small manufacturing — are up 27% year-to-date.
Who Wins in This Fire
Money markets and short-term bond funds are enjoying a golden age. The yield on six-month Treasury bills has exceeded 5.4%. Investors are shifting trillions of dollars from stocks into instruments with guaranteed returns. Assets in money market funds have reached $6.4 trillion — an all-time record.
Banks are also benefiting. JPMorgan's net interest income rose 11% in the first quarter. Bank of America earned an additional $2.3 billion in margin from rising rates. Large players lend at 8–9% and pay 0.5% on deposits — a spread they haven't seen since pre-crisis times.
But the tech sector is in turmoil. The Nasdaq has lost 8% from its April peak. Venture investors have frozen deals: why risk startups when six-month bonds yield 5.4% risk-free? US venture investment fell to $28 billion in the first quarter — the lowest since 2019.
Cash Is King Again
Retail investors are also shifting into cash and short-term bonds. Robinhood launched a 5.25% yield on uninvested cash. Fidelity promotes money market funds in its app more aggressively than ETFs. The slogan "cash is a position" is back in traders' vocabulary, as in 2022.
The crypto market is reacting nervously. Bitcoin has fallen below $58,000, losing 14% from its April highs. High rates kill the appeal of risk assets: if a risk-free instrument yields 5.4%, Bitcoin with its volatility must promise much more — and it promises nothing.
July, September, and Beyond with No Light at the End of the Tunnel
The futures market currently prices in the following schedule: a 25-basis-point hike on July 24, then a pause through year-end. But traders have been wrong all last year — first expecting rate cuts, then clinging to a neutral stance, now surrendering to reality.
If the May CPI, due June 12, again shows a reading above 3.5%, the scenario will change radically. Two consecutive hikes — in July and September — would become the baseline forecast. The ten-year yield would break 5.2%. Mortgages would go above 8.5%. A recession would shift from "possible" to "inevitable."
At his last press conference, Powell dropped a phrase that analysts parsed word by word: "We are prepared to act if the data warrant." April CPI warranted action. June data may warrant double. The central bank is once again the market's biggest enemy — and this marriage cannot be dissolved while oil challenges multi-year highs and the Iranian question hangs in the air with no solution in sight.
— Editorial Team
