Stock Market Wavers as Investors Guess What the Fed Is Thinking

The yield on the two-year Treasury note, which is sensitive to changes in Fed policy, rose on Monday to 3.95 percent, hitting its highest point since 2007 and continuing a remarkable run since the start of the year, when it was under 0.75 percent. Rising yields flow through to mortgages, credit cards, business loans and other borrowing costs, crimping economic activity.

Most investors still expect the Fed to stick to a 0.75- percentage-point increase on Wednesday based on prices for futures, which indicate investors’ expectations for rate increases. A small number of investors, however, are betting on a full-point increase, which would be the Fed’s biggest since 1984 and probably result in stocks lurching lower.

Last week, analysts at Nomura predicted that the Fed would raise rates by one percentage point, saying the stubbornly high inflation numbers require a more “forceful” response from policymakers.

Other central banks have taken similar steps, or are considering them. The Bank of Canada raised interest rates by one percentage point in July. Some bankers forecast that the Riksbank, the Swedish central bank, could raise rates by one percentage point on Tuesday.

And while most investors still expect a three-quarter-point boost from the Fed on Wednesday, the futures market shows that investors have rapidly adjusted to the idea that more interest rate increases are to come, expecting a peak between 4.25 percent and 4.5 percent next year, before falling toward the end of the year.

To get a closer read — and not from Mr. Powell’s comments — investors will also look for changes in the Fed’s “dot plot,” the name given to the collection of dots created by plotting the interest rate forecasts of individual policymakers on a chart. In particular, they will look for signs that the Fed is willing to keep interest rates elevated to tackle inflation, even as they forecast slowing economic growth, raising the risk of the economy’s slipping into a recession.

“That’s the ugly scenario,” said Guy LeBas, chief fixed-income strategist at Janney Capital Management. “That’s the signal, in theory, that the Federal Reserve is prioritizing inflation above economic growth and will do so for a while.”

Article source: https://www.nytimes.com/2022/09/19/business/stocks-inflation-federal-reserve.html