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Fed prepares to increase rates by 75 basis points

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Yahoo Finance Live anchors discuss reports that the Fed is preparing for a 75 bps rate hike.

Video Transcript

- All right, guys. Last week's CPI report showed inflation is still running hot as the Fed signals it's eyeing another 75-basis-point rate hike. Now, some policymakers have even left the possibility of a 4-point increase on the table. Meanwhile, others like Christopher Waller say that that's not going to happen here.

Particularly here, it's being priced into exactly where we're seeing some of this pre-market activity continue to move forward with the major averages largely pointing higher here and, particularly, trying to take off the table to the best of their ability the probability that we would see a 100-basis-point rate hike even larger than the 75-basis-point, which was the largest that we had seen in, what, decade? A decade, I believe. And so all of this considered, I think for a market that's continued to try and get the weight of the Fed out of the room, it's still very much there. It's just, how present are they going to be throughout the rest of this year into the second half and the aggressiveness of that as well?

- Yeah, they really tried to walk back this notion.

- Yes.

- Yeah. You noted about that good "Journal" story.

- Actually, if I could just jump in here because, you know, you said the Fed. That's, like, my magic keywords.

- Bat signal.

- I'm like the genie. When the Fed comes up, I want to stay. When we talk about the reporting over this weekend right from the "Wall Street Journal" saying that Fed officials are likely to consider that 75-basis-point increase, I mean, it's notable. I mean, Nick Timiraos, the journalist behind that story, was the same one who reported the initial pivot during that June FOMC meeting, when everyone was expecting only a 1/2 percentage point increase. We got 75 basis points instead.

The reason why this reporting is so important is because right now we are in that Fed blackout period. It's that historical 9- to 10-day period leading up to a meeting where Fed officials don't make any remarks. And we're seeing that baseline thing happen. You mentioned the Chris Waller remarks, Brad.

But also, we have to remember that the tonal change did come in the form of that University of Michigan's Consumer Sentiment reading showing that things were actually a little bit better and things hadn't deteriorated as bad as some people had thought as of that read. At the same time, we have to acknowledge the University of Michigan-- it's an interesting report. The sample size is not all that big. So what we're acknowledging here is that the economic data is very volatile. And it could be a little bit of a dangerous game for the Fed to be hinging their messaging and kind of their positioning in the market expectations off of every single data point.

You have Evercore ISI saying last week, quote, "It seems borderline ridiculous that policy plans market rate expectations and risk assets are being bounced around so much by noisy releases." That's going to be a story to come.

- Well, and it's ironic, of course, because the Fed has hammered over and over again, well, A, that it's data dependent. So it goes along with that. But, B, that it's not going to make its decisions off of a single report, right? Or even a handful of reports.

The Fed's message has been that it's going to look at the longer trend. What I would argue, though, is the difference between the pivot, the data leading up to the pivot and the data leading up to this meeting, is that there was a clear change. It wasn't just that the data was bad or good or whatever. It was that there was a sharp deterioration in the University of Michigan, that inflation came in much higher than estimated.

And this last week's data didn't show that kind of a clear deterioration.

- It wasn't thematic. Right.

- And it wasn't as dramatic either.

- It wasn't as dramatic. And it wasn't as consistent. And you do wonder, though-- we're going to get more economic data this week, right?

- True.

- I mean, things could change. I mean, the Fed meeting is not until next Wednesday-- not this Wednesday, next Wednesday. We're going to get a lot of data on housing starts and kind of the state of the mortgage market. And that is a specific area where Chris Waller, the Fed governor-- not a Fed president, a Fed governor, said, I'm calling for 75 basis points right now. But depending on inflation expectations and the retail sales report, which we already got last Friday, and the housing data, which I think this is going to be the big week for that, that can make-- that can make the story change too.

Remember, mortgage rates have actually gone down as of late. What does that do to the housing market if that shows continued he on that side of things? We know owners equivalent rent is a massive contributor to headline inflation. Maybe that creates some pressure that incentivizes the Fed to go more aggressive.

But at least for right now, market pricing seems to be-- they're going to go with that 75 bips instead of 100 next Wednesday.

- Well, if they do-- if they do 100 basis points-- to your point, Brian this is a market no longer prepared for 100-basis-point rate hike from the Fed. I'm looking at a Goldman report that hit over the weekend saying, the pullback in inflation expectations reduces the impetus for 100-basis-point rate hike, noting they're calling out reduced inflation expectations in that University of Michigan sentiment. And what have we seen over the past few sessions? Tech stocks rally, the market's rally here as inflation--

- They can't do 100.

- They can't do 100.

- I'm just--

- No, they can't.

- Full stop.

- They can't.

- Unless Nick Timiraos comes out with another story right?

- They can't.

- I mean--

- It would shock the market. I mean, the stocks would go straight down.

- And that's not how this Fed operates, right?

- And this is the thing. It's all about expectations here, right? A lot of people have made the argument, well, why doesn't the Fed just do the whole thing right now? Just raised to 3 and 1/2% to 4% tomorrow, right? But the problem is that markets will not be ready for that. That would lead to a massive blow out in spends.

But you also have to remember there is a massive international story to this as well. As the Fed gets more aggressive, you're having a lot of emerging markets having difficulty keeping up with the Fed's rate increases. And if that happens, could we get in to another 1994 Mexican peso crisis, a 1997 Asian financial crisis, where you have a lot of these emerging markets struggling to keep their currencies afloat.

You have massive losses in foreign direct investment. Things blow out. You have something blowing up across overseas. That ends up spilling back over to the United States. I mean, you see the Hong Kong Monetary Authority this morning having to defend their currency because they have a peg to the US dollar.

It's not just an inflation story domestically. It's not just a spending story domestically. We're thinking about international financial vulnerabilities as well.

- All right, Brian Cheung really laying down what's at stake here with this interest rate increase. Thanks so much. Appreciate it.