With inflation above 9%, investors are attaching the odds of the biggest Fed rate hike since 1989 this month

• Investors are attaching a 50% chance the Fed will hike interest rates by a full percent this month.
• With inflation rising 9.1% through June, expectations that the Fed will get tougher are rising.

Hotter-than-expected inflation through June has raised expectations among investors that there is a strong chance the Federal Reserve could hike interest rates by as much as a full percentage point this month.

The interest rate futures market shows investors anticipate a 48.7% chance that the Fed will lift rates by 100-basis points to 2.75% at its next meeting on July 27. That's up from an almost non-existent chance on Tuesday before June inflation data showed price pressures soared by 9.1%, way above expecations, according to the CME's FedWatch Tool.

The last time the Fed raised interest rates by that much was over 30 years ago, in February 1989, when it lifted rates to 9.75% from 8.75%. Eight months later, the stock market experienced one of its biggest one-day slides in history, when the Dow Jones cratered by 7% in what is now known as "Black Friday".

Searingly high inflation ripping through the US economy is forcing the Fed the slam on the brakes with aggressive monetary policy. It kicked off with a 75-basis point hike last month, which was already the largest since the mid-1990s, but with the US Consumer Price Index climbing 9.1% through June - the fastest rate since November 1981 - it's made investors think the Fed will only get tougher.

Such fast price growth has sent the dollar surging to a 20-year high and driven the greenback to the point where it reached parity with the euro for the first time since late 2002 this week. It's also sparked fears that the US economy could tumble into a recession as higher rates erode consumer spending and business investment.

On Wednesday, the futures market showed investors were attaching as much as an 80% chance of the central bank raising rates by a full percentage point. But those expectations have since subsided.

Talk of the Fed lifting interest rates by a full percentage point has been circling within the industry, with key economists like Mohamed El-Erian saying the latest inflation reading leaves the Fed with no choice but to act more aggressively.

"It is sure to increase interest rates by 0.75 percentage points later this month and could well consider a 1 percentage point rise," he said.

Top banks including Citi echoed that sentiment, saying a 100-basis point rate hike in July is likely, per Bloomberg.