While Federal Reserve Chairman Kevin Warsh faces an interest-rate showdown of doves and hawks next week that speaks to the credibility of the central bank as well as his own, investors are mulling how best to navigate the expected market volatility that awaits, regardless of his efforts.
That’s in part because the Fed traditionally doesn’t play the “one and done” game when it comes to increasing the benchmark short-term interest rate. The Federal Open Market Committee reset of the Federal Funds Rate usually arrives in a package of at least two.
“For the Fed, it is time to put up or shut up,” Omair Sharif, president and founder of Inflation Insights LLC, wrote in a note to clients first reported by Bloomberg.
TD Securities is among the big banks which raised Fed forecasts beyond two hikes after the Sept. 11 August CPI report rose more than expected.
TD Securities said it expected a .25 basis-point hike during the FOMC meeting Sept. 15-16, but didn’t stop there.
“We expect a total of three interest rate hikes in this cycle. We anticipate the next two hikes to occur in October and January of next year,’’ the note to clients said.
Fed rate-hike odds surge after hottish August CPI
Consensus forecasts expect 25 basis-point hikes from the current 3.50% to 3.75% in September and December after the hottish August CPI rate raised alarms that higher prices from oil and tariffs weren’t causing a one-time supply shock.
Greg Gizzi, Chief Investment Officer of Fixed Income and Head of Municipal Bonds at Nomura Asset Management, said to expect continued two-way price action as investors adjust to genuine uncertainty about whether the Fed will hike into year-end or give disinflation more time to work.
“The key takeaway for retail investors is that the final stretch of disinflation is proving more challenging than anticipated, and Chair Warsh has made clear the Fed’s 2% PCE target is fixed and non-negotiable,’’ Gizzi told TheStreet in an email, adding that if the Fed holds rates unchanged, “markets may call into question’’ the Fed’s credibility.
“For investors navigating bear-market jitters and elevated volatility, the most likely scenario is a 25 basis-point hike that extends pressure on rate-sensitive sectors,’’ Gizzi said.
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Futures traders up the odds of rate hikes
The CME Group FedWatch Tool jumped to an 86.3% probability of a 25 basis-point hike at the Fed’s Sept. 15-16 gathering after the August CPI report showed headline CPI up .04% from July and 3.4% year over year. Core CPI rose 0.3% month over month and 2.4% year over year.
KPMG Chief Economist Diane Swonk said in a LinkedIn post that the rate hike was needed because the “burn of inflation is just too costly’’ and needs to be contained.
“The Fed is poised to take back what it gave in cuts last year; otherwise the bond market could have a larger tantrum. The vote could be unanimous, which would help with Fed’s inflation-fighting credibility,’’ Swonk said.
Fed rate path forecasts diverge
John Luke Tyner, Portfolio Manager & Head of Fixed Income at Aptus Capital Advisors, said the expected Fed rate hike next week doesn’t guarantee additional increases in the short term.
“For market participants we are hopeful this will serve as a clearing event, allowing market participants to return to focusing on data and fundamentals,’’ he told TheStreet in an email.
Webs ETFs CEO Ben Fulton said the possibility of more rate hikes exists after next week.
“What the market really wants is clarity, and every bit of clarity allows for better decision-making. Relying on AI developments to tell us where we stand is too abstract,’’ he told TheStreet in an email. “Diesel at $6 a gallon is tangible, and it means costs are going to continue to rise while consumers already feel the squeeze.’’
Related: Small CPI surprise could trigger big Fed rate decision