- Most Wall Street firms and markets see 75-basis-point increase
- Powell previously signaled a half-point hike was probable
By Rita Nazareth
June 15, 2022
Stocks climbed, bond yields tumbled and the dollar weakened, with traders betting the Federal Reserve will deliver its biggest rate hike in almost three decades to curb rampant inflation and avoid steeper tightening down the road.
Almost 95% of the S&P 500’s shares gained in a rebound that followed the gauge’s worst five-day selloff since the onset of the pandemic. Treasury two-year yields — which are more sensitive to imminent policy moves — tumbled as many as 14 basis points. Money markets and major Wall Street firms including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc now see the Fed boosting rates by 75 basis points. The last time the officials hiked by that amount was under then Chair Alan Greenspan in 1994.
US policy makers conclude their two-day meeting Wednesday, with a decision due at 2 p.m. in Washington and Chair Jerome Powell’s press conference 30 minutes later. The Fed chief indicated in May that officials would move forward with half-point rate hikes in June and July as long as economic data came in as expected. But in the past few days, inflation figures have surprised to the high side, pushing investors to bet on a bigger increase. The so-called dot plot, which the central bank uses to signal its outlook for the path of interest rates, will likely not reflect the latest thinking by Fed officials — given that participants had to submit their projections before this week’s market developments.
“The Fed is likely to bow to pressure and match market expectations with a hike of 75 basis points,” said Fawad Razaqzada, market analyst at City Index and FOREX.com. “If it doesn’t, and it is ‘only’ a 50 bp hike, then I would expect to see a sharp relief rally for risk assets and a drop in the dollar. That being said, any weakness for the greenback is likely to be short-lived. The Fed remains head-and-shoulders above other major central banks in terms of hawkishness.”
Sam Zell, founder of Equity Group Investments, told CNBC that if he were the chairman of the Fed he would raise rates by a full point Wednesday. He believes the central bank’s credibility “has been lost” and it needs to do something to regain it and convince the world that it intends to “get control” of inflation. Late Tuesday, Pershing Square founder Bill Ackman said officials would be better off by raising rates 100 basis points “tomorrow, in July and thereafter.” He noted the central bank has allowed inflation “to get out of control” and called for “aggressive action” that would help restore market confidence.
More comments:
- “A more aggressive hike by the Fed today will help the markets bounce over the near-term,” said Matt Maley, chief market strategist at Miller Tabak + Co. “Yes, that bounce might not take place immediately, but given that the stock market is getting oversold and sentiment has become very bearish, we think a more than 50 basis point hike should lead to a bounce before too long.”
- “While markets now expect a 75-basis-point rate hike by the Fed, the press conference following the release of the statement this afternoon will help analysts assess the Fed’s ability to navigate Chairman Powell’s so-called “softish” landing as it takes a more aggressive approach in stanching inflation,” said Quincy Krosby, chief equity strategist for LPL Financial.
- “Market pricing is likely near an extreme right now, but the Fed needs to signal that it is serious about tackling inflation,” said Win Thin, global head of currency strategy at Brown Brothers Harriman.
If recent history is any guide, the Fed meeting potentially offers a chance for stocks to enjoy a little rally. Over the past year, the S&P 500 moved higher after six out of eight Fed rate decisions. In January and March, stocks rose about 6% and 9% in the days following the central bank’s gatherings — rebounding from steep losses leading into the announcements.
On the economic front, US homebuilder sentiment slid to a two-year low in June as rising inflation and higher mortgage rates weighed on housing demand. Retail sales fell in May for the first time in five months, restrained by a plunge in auto purchases and other big-ticket items. A gauge of New York state manufacturing activity unexpectedly contracted for a second month in June, while a measure of inflationary pressures at producers picked up.
Elsewhere, the European Central Bank accelerated work on a new tool to combat unwarranted jumps in euro-area bond yields as markets strain at the prospect of the first rate increases in more than a decade. Following an emergency meeting Wednesday, convened after Italian yields surged to the highest since Europe’s sovereign-debt crisis, the Governing Council said it’s instructed committees to create a new instrument to tackle so-called fragmentation.
Meantime, Bitcoin tumbled again, driving the token to the brink of $20,000 as evidence of deepening stress within the crypto industry kept piling up.