Fed hiked charges by three-quarters level, may gradual tempo

The Federal Reserve is expected to hike interest rates by three-quarters of a percentage point on Wednesday and then signaled it could start scaling back its rate hikes as early as December.

Markets are primed for the fourth consecutive 75 basis point hike and investors are expecting the Fed to slow its pace before ending the hiking cycle in March. One basis point corresponds to 0.01 percentage points.

“We believe they go up just to reach the end point. We think they’re going up by 75. We believe they open the door for a step down in rate hikes from December,” said Michael Gapen, Bank of America’s chief US economist.

Gapen said he expects Fed Chair Jerome Powell to indicate during his press briefing that the Fed has talked about slowing rate hikes but has not committed to it. He expects the Fed to hike rates by half a percentage point in December.

Federal Reserve Chairman Jerome Powell takes questions from reporters during a news conference following a two-day Federal Open meeting, after the Federal Reserve raised its target interest rate by three-quarters of a percentage point in a bid to stem a disruptive spike in inflation Market Committee (FOMC) in Wash., June 15, 2022.

Elisabeth Franz | Reuters

“The November meeting isn’t really about November. It’s about December,” Gapen said. He expects the Fed to hike rates to somewhere between 4.75% and 5% by spring, and that would be its final rate — or endpoint. Wednesday’s 75 basis point hike would take the Fed’s interest rate range to 3.75% to 4%, from a zero to 0.25% range in March.

“The market is very fixated that there will be 50 75 in November [basis points] on December 25th, February 1st and then probably another 25 in March,” said Julian Emanuel, Head of Equities, Derivatives and Quantitative Strategy at Evercore ISI. “There is no way I see the outcome of his press conference becoming more dovish.”

The stock market has already rebounded on expectations of a slowdown in rate hikes by the Fed after a recent 75 basis point hike on Wednesday afternoon. But strategists also say the market reaction could be violent if the Fed disappoints. The challenge for Powell will be walking a fine line between signaling that less aggressive rate hikes are possible and delivering on the Fed’s promise to fight inflation.

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Because of this, market experts expect the Fed chair to sound hawkish, which could shake stocks and push bond yields higher. Yields move inversely to price.

“I think he’ll try to do the fine art of getting out of 75 [basis points] without creating euphoria and too easily influencing financial conditions,” said Rick Rieder, BlackRock’s chief investment officer for global fixed income. I had to thread the needle to not get people too excited about the direction of travel. Fighting inflation is their primary goal.”

As the Fed has been raising interest rates, the economy is starting to show signs of slowing down. The housing market plummets as some mortgage rates nearly doubled. According to Freddie Mac, the 30-year fixed-rate mortgage was at 7.08% for the week of October 28, up from 3.85% in March.

“I find [Powell] will say that four 75 basis point raises is a lot and with this long and variable lag you need to step back and see the impact. You see it in housing. You’re starting to see it in cars,” Rieder said. “You see it in some of the declines in retailers and you certainly see it in the polls. I think the idea of ​​you slowing down is important the way he describes it.

The Fed should be reliant on incoming data, and while inflation is declining, the pace of the decline is unclear, Rieder said.

“If inflation continues to surprise at high levels, he shouldn’t rule out his options,” he said.

Consumer inflation was a hot 8.2% yoy in September.

Gapen expects the economy to slip into a mild recession in the first quarter. He said the stock market would be concerned if inflation stayed so high that the Fed would have to hike rates even more than expected, threatening the economy even more.

“The markets want to be relieved, especially the stock markets,” said Rieder. “I think what happens to the stock market and the bond market is different because of the technique and the leverage. … But I think the market wants to believe that the Fed will hit 5% and stay there for a while. People are sick of being bludgeoned and I think they want to believe the bludgeoning is over.

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