Investors are betting that the US Federal Reserve will announce on Wednesday its first interest rate hike by 75 basis points since 1994 – a sharp shift in market expectations in recent days as inflation turns out to be more persistent than expected. The US Federal Reserve, like the Bank of Canada, is pushing up interest rates faster in an effort to tackle inflation. After raising interest rates by 50 basis points in May, Fed officials said another half-point move was possible at their next meeting on June 15. In recent days, however, financial markets have begun to ignore these signs and price more. Market expectations for interest rates to rise by 75 basis points rose more than 90 percent on Tuesday, from just 4 percent a week ago, according to the CME Group’s FedWatch tool. It is based on futures contracts used to hedge exposure to interest rate movements. This change in investor climate has upset financial markets. Bonds, stocks and alternative assets such as cryptocurrencies have sold out dramatically in recent days. Yields on 10-year U.S. government bonds have risen more than 40 basis points since Friday – reaching 3.49 percent on Tuesday, the highest level since 2011. (Yields and bond prices are moving in opposite directions.) With interest rates soaring, these favorite personal finance rules are void. How the cryptography crash exposed the industry’s lies – and left private investors in the lurch Meanwhile, the S&P 500 officially entered the bear market after falling almost 4 percent on Monday. The stock market stabilized on Tuesday, with the S&P 500 falling 0.38%, while the Nasdaq Composite rose 0.18%. A sharp jump in the Fed’s core interest rate this week could increase the likelihood of a “hard landing” – a scenario in which the central bank pushes the US economy into recession to tackle inflation and dampen expectations for further price increases than becoming unfounded. The change in expectations for an increase in market interest rates followed the release of US Consumer Price Index data on Friday. It showed annual inflation at 8.6 percent in May, the fastest rate of price increase since 1981. That outpaced Wall Street estimates and dashed hopes that inflation had begun to rise. A pair of reports released in recent days by the Federal Reserve Bank of New York and the University of Michigan have been added to the argument for exorbitant interest rate hikes. They have shown that Americans are increasingly expecting inflation to remain high. This is a dangerous situation for the Fed, as inflation expectations can be self-fulfilling, with companies setting prices and employees demanding wages based on where they think inflation is headed. “We can not allow a spiral in wage prices to occur and we can not allow inflation expectations to be canceled,” Fed Chairman Jerome Powell told a news conference after the central bank meeting in May. “It’s something we can not allow to happen.” Markets also appear to have reacted to a report in the Wall Street Journal on Monday stating that recent data on consumer price index and inflation expectations “are likely to lead Federal Reserve officials to consider the possibility of surprising the markets with a higher than expected 0.75 percentage point increase in interest rates “. The Fed is in a period of blackout ahead of the announcement of interest rates and has not commented on recent market movements. Mr Powell said in May that a 75-point increase was “not something the commission is actively considering”. “The Hiking 75 is not going to be a cost-free move by the Fed,” Derek Holt, chief financial officer at Bank of Nova Scotia, wrote in a note to clients. “If they do increase by 75 bps tomorrow, then even their forward guidance for a single encounter will be completely useless. “Every meeting will be an open season for the Fed and the power to increase market volatility will be handed over to the media.” Fed officials have stressed the need to be “agile” and adjust monetary policy based on incoming economic data. The federal funds rate is currently set in the range of 0.75 percent to 1 percent. Markets expect the Fed to push this interest rate sharply higher in the coming quarters, reaching close to 4% early next year. In Canada, central bank officials have said in recent weeks that they are open to raising interest rates by 75 basis points. The Bank of Canada raised its policy rate by 50 basis points in early June and said it was “ready to act more vigorously if needed.” Bank of Canada Governor Tiff Macklem said last week that there was a growing likelihood that the bank would need to push its benchmark interest rate to 3% or more to tackle rising inflation. “We may need to take more interest rate steps to bring inflation back to target. “Or we may need to move faster, we may need to take a bigger step,” he said. Your time is precious. Have the Top Business Headlines newsletter with convenient delivery to your inbox in the morning or evening. Register today.
