Stock markets falter as investors guess what the Fed is thinking

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The yield on the two-year Treasury note, sensitive to changes in Fed policy, rose to 3.95% on Monday, hitting its highest level since 2007 and continuing a remarkable run since the start of the year, as a it was less than 0.75%. . Rising yields affect mortgages, credit cards, business loans and other borrowing costs, dampening economic activity.

Most investors still expect the Fed to hold on to a 0.75 percentage point hike on Wednesday based on futures prices, indicating investors’ expectations for higher rate. A small number of investors, however, are betting on a full point hike, which would be the Fed’s biggest since 1984 and likely send stocks lower.

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

Other central banks have taken similar steps or are considering doing so. The Bank of Canada raised interest rates by one percentage point in July. Some bankers expect the Riksbank, Sweden’s central bank, to raise rates by one percentage point on Tuesday.

And while most investors are still expecting a three-quarter point hike from the Fed on Wednesday, the futures market shows investors have quickly adjusted to the idea that further interest rate hikes are ahead, expecting a peak between 4.25% and 4.5% next time. year, before falling towards the end of the year.

To better understand – and not from Mr. Powell’s comments – investors will also be looking for changes in the Fed’s “dot plot”, the name given to the collection of dots created by plotting interest rate forecasts. individual decision makers on a graph. In particular, they will be looking for signs that the Fed is willing to keep interest rates high to fight inflation, even if they expect economic growth to slow, increasing the risk that the economy will slide into a tailspin. a recession.

“It’s the worst-case scenario,” said Guy LeBas, chief fixed income strategist at Janney Capital Management. “It’s the signal, in theory, that the Federal Reserve is prioritizing inflation over economic growth and will be doing so for some time.”

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