Traders are now almost certain that the Federal Reserve will make its third straight 0.75 percentage point rate hike when it meets later this month. CME Group Fed Watch tracker for Fed funds futures bets. This is followed by a slew of positive economic data and statements from Fed officials, suggesting dovish policies are likely to continue going forward. In a key speech of August 26, Fed Chair Jerome Powell warned that rate hikes will continue and higher rates are likely to remain.
Even as traders increased their bets on Fed tightening, stocks rose shortly after the market opened. A Wall Street Journal report notes that the probability of a 0.75 percentage point rise coincided with dealer prices in the most aggressive move, with stock futures dipping temporarily in the last two sessions.
Less than three months later, 75 basis points has become something of a global norm as the [European Central Bank] and Bank of Canada stand ready to hike rates by 75 basis points,” Citigroup economist Andrew Holdenhurst said Wednesday in a customer notification “. “Fast” rate hikes follow a similar logic: in economies where inflation is well above target, there is little reason not to at least bring policy rates and financial conditions back to “neutral” territory, unless one enters restrictive territory “, he added.
In fact, in his speech at the Fed’s annual meeting in Jackson Hole, Wyoming, Powell said the central bank needs to move beyond the neutral interest rate, which is not seen as pro- or anti-growth. He said the tightening policy is necessary to quell inflation, which is nearing its highest pace in more than 40 years. “We are deliberately shifting our policy stance to a level restrictive enough to bring inflation back to 2%,” he said. Looking ahead, Powell added that “re-establishing price stability will likely require maintaining a tight monetary policy stance for some time. The historical record strongly warns against premature monetary easing.”
The Federal Reserve has hiked interest rates four times this year, totaling 2.25 percentage points.
Those hikes included two 0.75 percentage point moves in June and July, the most aggressive since the Federal Reserve began using the interest rate benchmark as their main policy tool in the early 1990s.Markets braced for a heavy dose of Fed speeches on Wednesday, culminating in Fed Governor Lael Brainard’s remarks at 12:40pm. ET Fed Governor Michael Barr will make his first public comments since being confirmed as vice president. Chairman of the Fed’s powerful banking regulator. Another speaker, Cleveland Fed Chairwoman Loretta Mester, reiterated her claim that the Fed’s interest rates are currently in a 2.25% to 2% range.
The 5% should surpass 4% next year and remain high until inflation eases. “In my opinion, it’s too early to conclude that inflation has peaked, let alone is on a downward path. Sustainably towards 2%,” Mester said. Powell will speak with the Cato Institute in a question-and-answer session on Thursday. Fed officials will be closely monitoring the remaining big data items ahead of the September 20-21 Federal Open Market Committee meeting.
The most important will be next week’s consumer price index, along with the producer price index. However, Hollenhorst believes these reports will have a larger impact on moves beyond September, with a three-quarter point rise this month very likely. “Rather than the size of September’s rise, markets could be more focused on the next rise in November. Our base case is a slowdown to 50 basis points, but this will also depend on the details of the next two CPI inflation reports.