The Fed will hike rates by 75 basis points this week and it should push the US dollar to record highs, Jefferies says

• Jefferies predicts that the Federal Reserve will raise interest rates by 75 basis points this week.
• Jefferies upped its call from 50 basis points after the May inflation reading hit a 41-year high.

Jefferies expects the Federal Reserve this week to deliver its largest rate hike in 28 years to tackle scorching inflation, a move that could push the US dollar to a fresh high against its major currency rivals.

Jefferies on Monday projected the central bank would increase the federal funds rate by 75 basis points when it concludes its two-day meeting on Wednesday. An increase of that size would be the largest since November 1994, when Alan Greenspan was serving as Fed chairman.

"Ourselves and Barclays have increased our Fed rate call to 75bps from 50bps at this meeting as we not only think the Fed SHOULD hike but that they actually WILL hike by that order of magnitude," Brad Bechtel, the global head of FX at Jefferies, said in a note released Monday.

Barclays on Friday switched its call to 75 basis points after the Bureau of Labor Statistics said the Consumer Price Index rose 8.6% in the year through May, in part as fuel prices zipped higher. Economists surveyed by Bloomberg had expected a reading of 8.3%, and the print confounded some expectations for an April inflation peak.

Bechtel said there's a "very compelling case" for why the Fed would go ahead with the higher rate increase, citing "how far they appear to be slipping behind the curve, how much pressure the administration and the Fed itself are under in this regard and how the combination of elevated CPI and declining consumer confidence really paints an ugly picture for how the US economy is shaping up."

Bechtel said a move of 75 basis points would be a surprise for some who were "holding a hard line" on expectations for the Fed, led by Chair Jerome Powell, to raise the key rate by half a percentage point. The widely watched US Dollar Index is "likely to rip through 105.00" on a Fed hike of that large size, he said.

But investors on Monday sent the index to a fresh 20-year high beyond that level during Monday's session, up 0.6% at 105.06. The surge suggests investors are preparing for a more aggressive move than the 50-basis-point hike they'd broadly priced in.

The central bank since March has raised the fed funds rate by 75 basis points, to a range of 0.75% to 1%. The Fed's fast pace of rate increases and its shift in tone last year to signal it would undertake an aggressive cycle of interest-rate hikes to try to cool inflation has contributed to the dollar index's 9% rise this year.

The index gauges the greenback's performance against the euro, the Japanese yen, the British pound, the Canadian dollar, the Swedish krona, and the Swiss franc.