How much will the Fed hike rates this week?

When the Federal Open Market Committee meets this week to consider its next policy move, it will find itself between a rock and a hard place: A stubbornly high inflation rate, which hit 8.3% in August, is about to hit it 40th anniversary high of 9.1% in June; and a slowing domestic economy, according to the Fed’s latest Beige Book edition, which notes that economic activity in the 12 districts covered by the Fed’s regional branches has slowed.

That aligns with a slew of real GDP reports suggesting that the US economy may already be in recession.

Then there’s the global economy, which according to World Bank data is headed for recession, and international shipping companies like FedEx, which sent a chilling message to Wall Street last week.

In these circumstances, the Fed faces a dilemma: go with a 100 basis point hike to bring inflation under control and risk pushing the economy into recession, or a 50 to 75 basis point hike to bring inflation under control Keeping the economy from sliding into recession, however, risks losing credibility in the fight against inflation.

So what is the most viable solution to this dilemma?

Anessa Custovic, chief investment officer at Cardinal Retirement Planning, thinks a 75 basis point hike is the most likely scenario, pointing to Fed futures. They assign an 80% probability of a 75 basis point rate hike and a 20% probability of a 100 basis point rate hike.

“It’s almost certain that we’ll see a 75 basis point hike on Wednesday when the Fed meets for its FOMC meeting,” Custovic told the International Business Times in an email. “The door is open for a 100 basis point raise, but I don’t think they will take it. I don’t see a scenario where the Fed will fall below 75 basis points. She will be seen as accommodating if she does so less, which will greatly diminish her credibility.”

Thomas Samuelson, chief investment officer at Vineyard Global Advisors, sees the probability of 75 basis points even higher than 80% after Tuesday’s significant inflation numbers were reported.

“The market is 85% expecting the Fed to hike rates 75 basis points next Wednesday (from 2.5% to 3.25%) and 14% expecting a sharp 100 basis point hike,” Samuelson said. “Expectations for future rate hikes have also risen as the market now expects at least 200 basis points of additional rate hikes by March next year, up from just 150 basis points earlier this month.”

Dan North, senior economist at trade credit insurer Allianz Trade North America, believes the Fed will continue its “no prisoners” approach to inflation next week, raising interest rates by 75 basis points. He points to the 100 basis point probability, which has risen to 38% since the last CPI report.

“Whether it’s 75 basis points or 100 basis points, the Fed is pushing the economy toward recession,” North said.

Yohay Elam, a senior financial analyst at FXStreet, is also in the 75bp camp.

“My expectation is that the Fed will hike rates 75 basis points as it originally signaled and refrain from a late move to 100 basis points,” Elam said. “Although high underlying inflation shocked markets, it doesn’t justify a four-fold increase in borrowing costs.”

How would that affect the stock market? It depends on how higher interest rates and a slowing domestic and global economy affect corporate earnings.

Samuelson expects S&P 500 earnings to rise 1% this year from $208.21 per share to $209.76 per share. This contrasts with declines of 5% to 20% typically seen during economic downturns.

“We expected downward earnings revisions this year as the deteriorating macroeconomic backdrop has been highlighted by many leading indicators, including an inverted yield curve, widening credit spreads and deteriorating stock market breadth,” Samuelson said. How much will the Fed hike rates this week?

Fry Electronics Team

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