The Federal Reserve is set to raise interest rates on Wednesday, but it’s unlikely to hike them by 100 basis points, CFRA said Monday. Such a massive hike would “unnerve Wall Street” as it would imply policymakers are overreacting to the August inflation report. Investors are pricing in a 20% probability of a rate move of 1 percentage point. Loading Something is loading.
The Federal Reserve is expected to raise its key interest rate this week, but it’s unlikely to hike by 100 basis points, a massive move that would rattle investors already anxious after the August inflation report, CFRA Research said Monday.
“We think a 100 bps hike would unnerve Wall Street, as it would imply that the Federal Open Market Committee is overreacting to the data rather than sticking to its game plan,” Sam Stovall, chief investment strategist at CFRA, said in a research note.
It “would increase the likelihood that the FOMC will eventually overtighten and lessen the possibility of achieving a soft landing,” he said.
The Fed led by Chair Jerome Powell is expected on Wednesday to deliver its fifth rate increase of 2022. Investors widely expect a third consecutive increase of 75 basis points to bring the fed funds rate to a range of 3% to 3.25%. But investors also see a 20% probability the Fed would vote for an increase of 100 basis points, or 1 percentage point, according to the CME FedWatch tool.
Stovall said last week’s hotter-than-expected August inflation report suggested a more rapid tightening trajectory than anticipated and a weaker growth path for gross domestic product into year-end. Headline inflation was 8.3%, cooler than 8.5% in July but higher than the 8.1% consensus estimate.
Treasury yields continued to move higher. The Fed-policy sensitive 2-year Treasury yield on Monday hit 3.96% for the first time since 2007, and 10-year Treasury yield rose above 3.5% for the first time since 2011. The yield curve inversion is seen as a signal of an economic recession.
Last week, marked the worst for US stocks since June as the Nasdaq Composite sank more than 5% and the S&P 500 fell about 4%. Stocks were lower on Monday. Stovall noted all sizes, styles, and sectors within the S&P Composite 1500 fell last week.
“Despite the possibility of an additional near-term decline in equity prices, CFRA Research still thinks the June lows will hold,” he wrote.
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