The Federal Reserve’s September meeting begins today and would conclude tomorrow. While the majority of observers believe that the Fed might announce a 75-basis rate hike, some expect Jerome Powell to announce a 100-basis point hike.
Pressure is building on the Fed to act decisively as US inflation has been quite sticky. While August CPI came in at 8.3%, and the metric has fallen for two consecutive months, on a monthly basis, August CPI rose 0.1%. Analysts were expecting the headline CPI to fall 0.1% on a monthly basis.
In July, US CPI was flat on a monthly basis. However, the August CPI release showed that the Fed has a long way to go before it tackles the menace of high inflation. Corporate America is also feeling the impact of higher inflation.
Yesterday, Ford said that it expects a $1 billion hit to its third-quarter earnings due to high inflation. The company arrived at the figure after contract negotiations with its suppliers. Ford stock has crashed this year but billionaire investor Ray Dalio bought Ford shares in the second quarter of 2022.
Traders Raise Interest Rate Expectations Ahead of Fed Meeting Outcome
Traders have been upwardly revising their estimates of US interest rates. Looking at the CME Fed Watch Tool, traders have put a 51.3% probability that the Fed fund rates would be 4.25-4.50% by the end of this year.
Currently, Fed fund rates stand at 2.25-2.50% after four successive rate hikes by the Fed. Notably, a month back, 45% of traders saw Fed funds rate between 3.50-3.75% by the end of 2022. None of the traders saw rates rising above 4% by the end of the year.
However, market sentiments have changed over the last month. Firstly, the minutes of the Federal Reserve’s July meeting were more hawkish than expected. If that was not all, at the Jackson Hole Symposium, Powell dashed all hopes of interest rates cut in the near future.
At the Jackson Hole Symposium last month, Powell said, “restoring price stability will likely require maintaining a restrictive policy stance for some time. The historical record cautions strongly against prematurely loosening policy.” He also warned of pain from the Fed’s rate hikes.
Sweden Raised Rates by 100 Basis Points: Would Powell Follow Suit?
Meanwhile, Sweden’s Riksbank has increased its policy rates by 100 basis points. It said, “The development of inflation going forward is still difficult to assess and the Riksbank will adapt monetary policy as necessary to ensure that inflation is brought back to the target.”
It added, “Rising prices and higher interest costs are being felt by households and companies, and many households will have significantly higher living costs.” However, the Swedish Central Bank cautioned “it would be even more painful for households and the Swedish economy in general if inflation remained at the current high levels.”
The remarks are similar to what Powell said at the Jackson Hole Symposium. Meanwhile, US Treasury yields continue to move upwards ahead of the Fed’s meeting. The 1-year Treasury yield has surpassed 4% while the 2-year Treasury Yield is near 4% and has hit the highest level since 2007.
Growth stocks have crashed this year amid the rise in Treasury yields. However, there are some investments that can outperform during inflation. Value and undervalued stocks have also outperformed the broader markets.
Would Fed Announce a 100 Basis Point Hike at the September Meeting?
Amid the turmoil in debt markets, bond guru Jeffrey Gundlach is bullish on bonds and advises investors to invest in bonds. Treasury yields and prices are inversely related. A fall in bond yields leads to a rise in bond prices.
Most brokerages expect Fed to raise rates by 75 basis points this month. However, some believe that a 100-basis point rate hike is not totally off the table.
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