US Fed Might Raise Rates By 75 Bps And No Longer 50 Bps – InvestorsJune 15, 2022
The change in expectations has resulted in more intense selloffs across various financial markets worldwide. A CME’s Fed Watch tool reads, “expectations of a 75-bps hike at the next meeting rose to 89% today from nearly 4% last week.”
New Investors’ Expectations Over Rate Raise
Hence, there is now an 11% chance that the Fed will increase the rate by 50 bps. This is a significant reduction compared to last week, when the expectation was nearly 100%. Investors are concerned that if their forecasts come true, it will hurt equities value, especially tech stocks.
Apart from being the biggest rate raise since 1994, a 75 bps rate raise would negate post-COVID-19 recovery. A 75 bps rate raise at this moment will be a massive blow for SMEs. Most of them are yet to fully recover from the effects of the 2020 lockdown on their businesses.
The intense selloff earlier in the week confirmed that the US S&P 500 equity index has fallen into a bear market. This index is down 20% from its latest closing high. Investors haven’t stopped liquidating their US stocks as they prepare for the aggressive rate increase from the Fed.
Tuesday’s treasuries market showed that US 2-year yields have risen to 3.439%. This increase is its largest since late 2007. This yield is a general measure of rate expectations. Also, benchmark US 10-year yields hit their highest level in eleven years. It rose to 3.479%.
The 2-and-10 years’ notes yield curve dipped by about 5.4 bps on June 14. Such dips usually indicate the start of a recession. The last time this curve dipped, it only reached 4.2 bps.
The Federal Reserve meeting will end on Wednesday with an announcement of a possible rate rise due immediately. However, last Friday’s data showed that US CPI is at a 41-year high.
The US CPI has increased 8.7% in the last 12 months. That was its biggest 12-month increase since 1981. However, the supposed core CPI gained 6% last month on a 12-month basis.
Investment banks make new predictions about the rate increase
Goldman Sachs, TD securities, and other investment banks predict that the Fed will increase rates by 75 bps this month and next. However, they predict that the rate increase will not exceed 50 bps by September.
Doubleline Capital CEO, Jeffrey Gundlach, suggested that the Fed funds rate increase shouldn’t exceed 3%. He made his suggestions via Twitter on Tuesday night. A top-level executive with Homestead Funds, Mauricio Agudelo, said, “there is a huge swing in investors’ expectations of a rate increase in the Fed’s June and July meetings.”
He added that “a 75-bps raise is likely this month and next.” “Our data shows that the market is doing the tightening for the Fed already. Hence, the Fed only needs to deliver.”