They put an 18% probability on a dramatic one full point rise, a move that would shock markets and reinforce the narrative that the Fed will do whatever it takes to get inflation under control.
But the Fed also knows that it takes a while for past rate hikes to penetrate the system. And if his playbook is too tough, it could trigger a damaging recession and widespread economic woes, as well as limit his options for future meetings.
“The faster the Fed hikes rates, the more likely they are to make a mistake,” Gennadiy Goldberg, senior US rates strategist at TD Securities, told me.
Since then, some credibility has been restored. Bond markets’ expectations of longer-term inflation have fallen sharply in recent months, a sign that these investors believe the Fed is doing its job.
Take a look: Compare the yields on standard US Treasury bonds versus inflation-linked ones. The difference — known as the breakeven rate — tells you how much inflation investors expect.
The five-year breakeven rate is 2.48%, well below the 3.59% peak in March and not far off the Fed’s 2% target. The 10-year breakeven inflation rate is 2.4%.
“A lot of this has to do with the Fed’s very hawkish tone and its promise to keep raising rates until inflation is brought under control,” Goldberg said.
Still, he warned that it was far too early to “declare mission accomplished.”
“It’s a very weak restoration of that confidence and that confidence in the Fed,” Goldberg said. “The difficulty now is that the Fed has to persevere. It’s easy to promise to be restrictive or very aggressive in the pace of policy tightening, but you’re really compelled to deliver that tightening at the end of the day.”
Dollar hits new 20-year high as Putin escalates war
The Latest: President Vladimir Putin announced an immediate partial mobilization of Russian citizens in a televised national address on Wednesday, threatening to use “all means at our disposal” to defend Russia “and our people”. He also referred to the possible use of nuclear weapons.
The speech sent the greenback up 0.4% against a basket of major currencies to its strongest level since 2002. In times of geopolitical tension, investors often seek a safe haven in US dollar investments.
Oil prices also shot up. Brent crude futures, the global benchmark, gained more than 2% to trade just under $93 a barrel.
The war has put additional pressure on investors as it makes it harder to predict when inflation will ease and could push central banks to remain aggressive for longer.
This also contributes to the uncertainty regarding the energy supply. Although gas reserves in Germany are 90% full, concerns remain.
Federal Economics Minister Robert Habeck said the country could “get through the winter just fine” without Russian gas, but warned of “really empty” supplies in the period afterwards.
And the costs are increasing. Germany nationalized its gas giant Uniper on Wednesday after a rescue attempt failed to shore up the utility.
On the radar: Kremlin-backed authorities in eastern and southern Ukraine have announced they will hold referenda on joining Russia this week. This could mark another turning point in the conflict.
The “SPAC King” loses his crown
Now even the outspoken venture capitalist has to deal with the consequences.
Palihapitiya announced on Tuesday that it was closing two SPACs after failing to find companies to merge with. All funds raised will be returned to shareholders.
“Ultimately, to close a deal, we would have required us to raise the price or buy an inferior asset – neither of which were things we were comfortable with,” Palihapitiya said. He also said he was seeing “resistance from management teams that were either unprepared or unwilling to face the public markets given the current volatility.”
Step back: Palihapitiya was one of the main proponents of SPACs and built a cult following among everyday investors. But his investment approach took a hit this year as markets took a hit, a sign of how quickly fortunes on Wall Street have changed.
Today as well:
- US Existing Home Sales for August Post at 10am ET.
- The Fed makes its latest policy announcement at 2pm ET, followed by a press conference with Chairman Jerome Powell.
Tomorrow: The latest monetary policy decisions from the Bank of England, the Bank of Japan and the Swiss National Bank.