As traders bet more on the Fed tightening, stock market futures went from being higher to being a little lower.
Traders now think it’s almost certain that the Federal Reserve will raise interest rates by 0.75 percentage points at its meeting later this month.
The CME Group’s FedWatch tracker of fed funds futures bets shows that the chance of a three-quarter point hike went up to 82% Wednesday morning.
That comes after a string of good economic news and comments from Fed officials that tight policy is likely to stay in place for a long time. Fed Chairman Jerome Powell gave a very important speech on August 26. He said that rate hikes will continue and that the higher rates are likely to stay in place.
“When the Federal Reserve raised rates by 75 basis points in June, it was a big change from the 50bp and 25bp increases at the two meetings before. In less than three months, 75bp has become something of a global standard. Both the European Central Bank and the Bank of Canada are planning to raise rates by 75bp, a Citigroup economist said in a client note on Wednesday.
“These “expeditious” rate hikes are based on the same idea: when inflation is well above target, there isn’t much of a case against moving policy rates and financial conditions at least to a “neutral” setting, if not into “restrictive” territory, he said.
In fact, Powell said in his speech at the Fed’s annual retreat in Jackson Hole, Wyoming, that the Fed will have to go beyond the neutral rate, which is neither good for growth nor bad for it. He said that tighter policies are needed to stop inflation, which is close to being at its fastest rate in more than 40 years.
As traders bet more on the Fed tightening, stock market futures went from being higher to being a little lower.
A Wall Street Journal report that said an increase of 0.75 percentage points was likely happened at the same time as both changes.
This year, the Fed has raised interest rates four times, by a total of 2.25 points. Among these increases were two changes of 0.75 percentage points in June and July, which were the biggest since the Fed started using the benchmark funds rate as its main policy tool in the early 1990s.
Wednesday was going to be a big day for Fed speeches, with Fed Governor Lael Brainard’s speech at 12:40 p.m. ET being the most important. Regional presidents Thomas Barkin of Richmond and Loretta Mester of Cleveland will also speak, as will Fed Governor Michael Barr, who will make his first public comments since being confirmed as vice chair for supervision, the Fed’s powerful banking watchdog.
Before the FOMC meeting on Sept. 20-21, Fed officials will be paying close attention to the last big pieces of data. The consumer price index and the producer price index will be the most important ones to look at next week.
But Hollenhorst thinks that these reports will have a bigger effect on moves after September. He thinks that a hike of three-quarters of a point is very likely this month.
“The markets may start to pay more attention to the next increase in November than to the size of the hike in September. Our base case is for a slowdown to 50bp, but this will depend on the details of the next two CPI inflation reports and the September jobs report, which will be released in early October,” he wrote.
