Why a hawkish Fed could scare the market
Stock and bond prices rallied in the weeks ahead of Wednesday’s expected rate hike, which could expose markets to a pullback if the Federal Reserve stays the course.
Signs of an economic slowdown have led to speculation on Wall Street that the central bank may soon ease its rate hikes in an attempt to stave off a recession. However, Fed Chairman Jerome Powell took an aggressive stance against inflation at the last meeting, and he may do so again on Wednesday.
“I think the Fed will be more hawkish than dovish. I think people in the market are expecting them to step back and slow down the hawkish nature of their general commentary, and I think this meeting they’re going to be disappointed ,” said Eric Merlis, Managing Director, Global Markets at Citizens Financial.
In fact, some traders have started pricing in rate cuts next year, anticipating a pivot from the Fed. The CME’s FedWatch tool shows a 100% chance that the federal funds rate will be 3% or higher by December, before dropping to around 75% in July 2023.
“I understand why the price is priced in but from a pure trading perspective you could see a lot of that setback today after the press conference,” Merlis said.
BlackRock’s Rick Rieder expects Fed to hike rates three more times
BlackRock’s Rick Rieder said he expects the Federal Reserve to raise rates by 0.75 percentage points on Wednesday and two more rate hikes could be considered before the central bank halts.
The central bank is expected to announce a 75 basis point rate hike on Wednesday afternoon. (1 basis point equals 0.01%)
“I think the implications will be that you’ll go to 50 in September and then I quite frankly think the markets have come to a point, which I think is fair, that they’re maybe going to do another 25 and I think that’s it,” said Rieder, chief investment officer of global fixed income at BlackRock.
He added that what Fed Chairman Jerome Powell said during his press conference on Wednesday afternoon will be key.
“The trick is to watch what they do, not what they say,” Rieder said. “I have to watch more what they say than what they do. That means I don’t think the 75 or the statement is going to be that interesting. And I think they have to tone down the economic section of the statement. But I think what he says will be more important than the 75 as long as the data is unambiguous about the slowdown.”
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–Darla Mercado, Patti Domm
Atlanta Fed’s GDPNow forecasts second-quarter GDP to fall 1.2%
The Atlanta Federal Reserve updated its real-time reading for economic growth on Wednesday, calling for a 1.2% decline for the second quarter.
Previously, the Atlanta Fed’s GDPNow tool predicted that gross domestic product would decline 1.6%.
The Atlanta Fed cited recent data releases from the Census Bureau and the National Association of Realtors as factors behind its decision. Indeed, pending home sales fell 20% in June on an annual basis, according to the latest data from the National Association of Realtors. Meanwhile, new orders for manufactured durable goods in June rose 1.9% to $272.6 billion, the Census Bureau found.
Second-quarter GDP data is due Thursday. Given that the first quarter saw GDP fall by 1.6%, economists and investors are wondering if this upcoming release will reflect two straight quarters of negative GDP readings.
However, two consecutive quarters of negative GDP do not constitute a recession. The National Bureau of Economic Research makes this decision and uses several factors to make this decision.
The Federal Reserve is expected to announce an interest rate hike of 0.75 percentage points
The Federal Reserve is expected to raise interest rates by 0.75 percentage points – its second hike of this magnitude since June and a first in the “modern era” of Fed policy.
The anticipated rate hike comes at a pivotal time as policymakers attempt to rein in inflation and provide the economy with a soft landing. June’s consumer price index jumped 9.1% from a year ago, and consumer spending in dollars was strong. Meanwhile, unemployment insurance claims have increased, suggesting the labor market is starting to cool.
Investors are paying close attention to the Fed’s decision on Wednesday, as second-quarter gross domestic product numbers are released on Thursday. GDP fell by 1.6% in the first quarter. Two consecutive quarters of negative economic growth could make the Fed’s rate hike path even more precarious.
–Darla Mercado, Jeff Cox