Weekly Brief: Investors Don’t Like The Look Of This Big Hike Ahead Of Them

Weekly Brief: Investors Don’t Like The Look Of This Big Hike Ahead Of Them

over 1 year ago3 mins

Inflation is only climbing higher, so this month could see the Federal Reserve (the Fed) embark on its biggest hike yet.

🕰 Recap

  • Last month, the Fed raised interest rates by 0.75 percentage points – its biggest hike since 1994
  • The economy seems to be taking those rate hikes in its stride: the US added 372,000 jobs in June – over 40% more than economists were expecting
  • That could tempt the Fed to be even more aggressive with its rate hikes, especially after data out this week showed inflation accelerated to a 41-year high in June

✍️ Connecting The Dots

The Fed, like every other central bank, spent most of 2021 claiming that inflation is just the “transitory” result of post-pandemic hiccups. But as consumer prices continued to shoot up every month and repeatedly hit multi-decade highs, that argument quickly fell apart and pushed the US central bank to embark on its most aggressive rate-hiking campaign in decades. It raised interest rates by 0.75 percentage points in June – its biggest hike since 1994 – and signaled that another hike of that size was possible at its next meeting this month.

But investors are now fretting over the possibility of a hike of a full percentage point, which would be the biggest increase since the Fed started using interest rates as its primary monetary policy tool in the early 1990s. The reason the Fed might consider such a supersized move is down to fresh data out this week, which showed that US inflation accelerated last month to a 41-year high. Consumer prices increased by 9.1% from a year ago, outstripping the 8.8% economists were expecting and a marked acceleration from May’s 8.6%.

So with inflation still at multi-decade highs, and with data out last week showing the US labor market is in good shape, the Fed might feel emboldened (or forced) to hike rates by a full percentage point. That could be why, according to the interest rate futures market, traders are currently pricing in a 50% chance of the unprecedented move.

🥡 Takeaways

1. The Fed giveth with one hand, taketh away with the other.

Traders are also pricing in more than three rate cuts next year, anticipating that the Fed will shift its stance as the US economy recoils from this year’s aggressive increases. The narrative that the US central bank will hike the economy into recession is getting stronger by the day, and a massive one in July would only add to those fears. If the Fed does push the economy into recession, expect stocks to struggle and bonds to thrive.

2. The Fed isn’t alone.

If the Fed does opt for a full percentage point hike, it would at least have company: more than 30 central banks have hiked rates by as much or more in one go this year. The latest was the Bank of Canada: investors were expecting a 0.75 percentage point hike going into the central bank’s meeting this week, but they were surprised when it went one notch higher. That might be the situation US investors find themselves in: there’s still a significant portion of investors who haven’t priced in a move of that magnitude, which means the Fed could cause chaos if it pulls the trigger.

🎯 Also On Our Radar

Wall Street is far from bullish on bitcoin: 60% of 950 institutional investors think the world’s biggest crypto is going to halve again to $10,000, according to a survey out this week. The other 40% saw its fortunes going the other way, but still only increasing to $30,000. The results show just how bearish investors have become toward the crypto sector after a string of bad news this year, from collapsing projects like Terra Luna to failing DeFi lenders like Celsius, which filed for bankruptcy on Thursday.

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