One of the oddest things about yesterday’s reaction to news from the Federal Reserve of a 75 basis point increase in interest rates was that the market initially rallied. Yesterday, September 21, from 3801 at 10:25 a.m.New York time, the Standard & Poor’s 500 moved up to 3895 at 2:40 p.m. right after the Fed released its news. And, then, markets began a retreat with the S&P 500 closing down 1.71% on the day. It’s almost like the markets constructed one story–relatively positive–in the immediate aftermath of the news. And, then, upon further consideration, built a different much less positive story to the close of the day. Make that “exactly” instead of “almost like.”
Fed raises interest rates by another 75 basis points as expected; Dot Plot signals rate increases for well into 2023
At today’s meeting of the Federal Open Market Committee, the U.S. central bank raised interest rates by 75 basis points for a third straight meeting. That took the Fed’s short-term benchmark rate to a range of 3% to 3.25%. This move was widely expected with the CME FedWatch Tool giving odds of 84% yesterday on a 75 basis point increase. What the market hadn’t expected was how negative the Fed’s projections in its Dot Plot would be. To sum up: Higher interest rates (with more rate increases) for longer. And very low economic growth but no recession.
You’d think that if everyone (maybe even Samuel Beckett) is expecting the Fed to raise interest rates 75 basis points at tomorrow’s meeting of the Open Market Committee, financial markets would have been able to move on today to other “issues.” (Like Ford’s huge negative earnings pre-announcement or the global supply crunch for coffee. The CME FedWatch Tool today puts the odds of a 75 basis point increase at 84%. The other 16% goes to a 100 basis point increase. Nobody is expecting just 50 tomorrow. But no. Stocks and bonds are lower but it feels like markets are just marking time.
Investors are expecting a 75 basis point increase in interest rates from the Federal Reserve at Wednesday’s meeting of its Open Market Committee. That would take the Fed’s target interest rate to a range of 3.00% to 3.25% from the current 2.25% to 2.50%. At least that’s what the market heavily expected as of Friday. The odds of a 75 basis point increase, according to the CME FedWatch Tool, which calculates the odds of a Fed move on interest rates by tracking prices in the Fed Funds Futures market, rose to 82% on Friday, September 16 from 74.0%on September 15.
My one-hundred-and-seventy-fifth YouTube video: “The Fed’s Real Inflation Problem” went up today. The CPI numbers came out and they were disappointing with Inflation running at an 8.3% annual rate in August. But the inflation problem is worst than the headline numbers indicate. Shelter, the single biggest component of the CPI inflation rate, was up by the most in August since 1991. And the Federal Reserve has very little ability to lower a runaway inflation rate in rents using its usual methods of raising interest rates and curbing growth in the money supply. That means the process of controlling inflation is going to be slow and difficult.
Yesterday there was a whiff of panic over the CPI inflation disappointment; today not so much with stocks moving slightly higher
Investors and traders have decided not to panic today. Which certainly wasn’t the case yesterday. I’ll leave it to you to decide if a 5.54% drop in the NASDAQ 100 is a measured reaction to inflation running 20 basis points hotter than projected. (Amazon (AMZN) fell 3.06%, Apple (AAPL) was down 5.87%, Applied Materials (AMAT) was lower by 6.14%, and Nvidia (NVDA) plunged 9.47%.) But I sure caught a whiff of panic in Wall Street calls for the Federal Reserve to raise interest rates by a full 1.00%–and not the widely anticipated–0.75% at the September 21 meeting of the Open Market Committee.
CME FedWatch odds of 75 basis points at September 21 meeting rise to 90%–after that the picture gets murky.
According to the CME Fed Watch Tool, which calculates the odds of a Fed move in interest rates by looking at prices in the Fed Funds Futures market, the odds of a 75 basis point interest rate increase by the Federal Reserve at its September 21 meeting have climbed to 90%. The odds were 87% yesterday and just 68% a month ago on August 9.
And what does the market expect after that? 50 basis points higher at the November 2 meeting (83% odds) and 66.5% odds that interest rates will finish the year at 3.75 to 4.00% after the December 14 meeting. After that though, the picture gets murky. And that murkiness is the reason, in my opinion, for another Bear market rally to end 2022.
Add Federal Reserve Bank of St. Louis President James Bullard and Fed governor to the list of those Fed voters speaking in favor of a 75-basis-point interest rate increase at the Federal Reserve’s September 21 meeting.
I think investors and, more especially traders, should be looking for another Bear market rally to begin after the Federal Reserve’s September 21 meeting. How confident am I on this call? Nothing is ever guaranteed in the financial markets, of course, but I’d give this scenario better than 75% odds of being correct. Here’s the setup behind this call and why I’m so confident.
Yesterday Richmond Federal Reserve President Thomas Barkin told The Financial Times that interest rates must stay high until inflation improves. 4% interest rates wouldn’t surprise him, he said.
Today, September 5, I’ve gone back through this Special Report to update any parts of my calendar in light of what we’ve learned about the economy, about Federal Reserve interest rate policy, and about the global economy in the last few weeks. This update includes my take on the August jobs report and on recent Fed-speak from the Jackson Hole conference and after. It is different this time. And it’s likely to “be different this time” for the next five years or so. And you need an investment strategy for that period.
This morning the financial markets had convinced themselves that the slight rise in the unemployment rate to 3.7% and the relatively modest addition of 310,000 jobs in August would lead the Federal Reserve to moderate its interest rate increase at its September 21 meeting to a hike of just 50 basis points instead of 75. By the close, however, the market was having second thoughts.