- Investors are awaiting a wave of rate hikes from central banks.
- There is a 20% chance that the Fed will raise rates by 100bps.
- Investors worry the Fed will tip the US into a recession.
Investors anticipate additional significant interest rate increases from central banks to tame inflation. Sweden set the tone early in the week, setting the stage for its US, Swiss, and British counterparts to follow.
Investors were concerned that the Federal Reserve was not strongly combating inflation a few months ago. After several significant rate increases, some worry that tightening the Fed’s monetary policy may cause the economy to enter a recession.
As the markets were still reeling from last week’s shockingly high inflation reading, Interest rate futures were pricing in a 20% possibility that the Fed would raise rates by 100 basis points on September 21. This was unthinkable when investors were arguing whether the move would be 50 or 75 basis points earlier this month
Investors have raised their forecasts for how high the Fed will raise rates. The terminal rate for US fed funds is now at 4.45%.
“We’re all scared of over-tightening and the hard landing scenario because the Fed has over-tightened and caused hard landings more often than they have not,” said Jeffrey Sherman, deputy chief investment officer at bond fund DoubleLine.
Despite the 225 basis points of tightening already implemented, figures from the United States suggest that the economy appears to be chugging along. However, the World Bank has warned that even a “moderate hit” might cause the global economy to enter a recession.
“There is rising risk that the Fed … will overshoot with rate hikes in response to stubbornly high inflation data,” said Steven Oh, Global Head of Credit and Fixed Income, Co-Head of Leveraged Finance at PineBridge Investments. “By doing so, they increase the risk of a recession rather than the soft landing they seek to achieve.”
This year, worries about Fed tightening have already contributed to a 19% decline in the E-mini S&P 500 (ES) futures.
Jerome Powell, the Federal Reserve chairman, said that pricing pressure might be reduced without a significant economic slowdown. But he has also highlighted that the central bank will fight against inflation with determination. All investors can do is wait and see what happens next.