Federal Reserve Chairman Jerome Powell speaks during a press conference in Washington, DC on July 27, 2022.
Mandel Ngan | AFP | Getty Images
Traders are now all but certain that the Federal Reserve will adopt a third consecutive interest rate hike of 0.75 percentage points at its meeting later this month.
The probability of a three-quarter point hike rose to 82% Wednesday morning, according to CME Group’s FedWatch tracker of federal funds futures rates.
That follows a string of positive economic data and statements from Fed officials that indicate tighter policy is likely to continue into the future. In a major speech on August 26, Fed Chairman Jerome Powell warned that hikes will continue and higher rates are likely to remain in place
Even as traders increased their bets on a Fed tightening, stocks rose shortly after the market opened. A Wall Street Journal report suggesting a 0.75 percentage point hike was likely coincided with a more aggressive move by traders, sending stock futures immediately lower.
“In June 1975 [basis point] The rate hike by the Federal Reserve was seen as a surprising acceleration from the 50 and 25 bps announced at the previous two meetings. In less than three months, 75 bp has become something of a global norm for both [European Central Bank] and the Bank of Canada plans to raise rates by 75 bps,” Citigroup economist Andrew Hollenhorst said in a note to clients on Wednesday.
“These ‘swift’ rate hikes follow a similar logic – in economies where inflation is well above target, there is little argument against at least returning exchange rates and financial conditions to ‘neutral’ settings, if not moving into restrictive territory,” he added. .
Indeed, Powell said in a speech at the Fed’s annual meeting in Jackson Hole, Wyoming, that the Fed would need to move beyond a neutral rate, which is considered neither supportive nor restraining growth. He said tighter policy was needed to stem inflation, which is approaching its hottest pace in more than 40 years.
“We are purposefully moving our policy to a level that will be restrictive enough to bring inflation back to 2%,” he said. Looking ahead, Powell added that “the restoration of price stability will likely require the maintenance of restrictive policy for some time. Historical evidence strongly cautions against premature policy easing.”
This year, the Fed raised interest rates four times by 2.25 percentage points. Those hikes included two 0.75 percentage point hikes in June and July, the most aggressive since the Fed began using its base rate as its main policy tool in the early 1990s.
Markets were set for a heavy dose of Fed speeches on Wednesday, the main one of which will be Fed Chairman Lyle Brainard’s speech at 12:40 PM ET. Regional presidents Thomas Barkin of Richmond and Loretta Mester of Cleveland will also speak, as will Fed chief Michael Barr, who will make his first public comments since being confirmed as vice chairman for supervision, the Fed’s influential banking watchdog.
Powell will speak at a question-and-answer session with the Cato Institute on Thursday.
Fed officials will keep a close eye on the rest of the big data ahead of the September 20-21 FOMC meeting. The main one will be the consumer price index next week, as well as the producer price index.
However, Hollenhorst believes that these reports will have a bigger impact on the movement after September, with a three-quarter point increase this month highly likely.
“Rather than the size of the hike in September, markets may start focusing more on the next hike in November. Our baseline is for a slowdown of up to 50 bps, but that will depend on the details of the next two CPI inflation reports, as well as the September jobs report (out in early October),” he wrote.