FOMC: How Wall Street might respond to a 75 basis point rate hike
Yahoo Finance Live’s Brian Cheung discusses the expectations for Tuesday’s FOMC meeting as well as how Wall Street could respond to a 75 basis point rate hike.
Video Transcript
- That steep sell off the last couple of trading days combined with the inflation print Friday, highest in 40 years, and consumer confidence at an all time low. Are these the ingredients that form a perfect storm that may force the Fed to rethink their prior stance? Brian Cheung covers the Fed for us and joins us now. So Brian, if these are not the ingredients to force a 75 point rate hike this week, what is? Circumstances have changed dramatically since Jerome Powell downplayed the likelihood of 75.
BRIAN CHEUNG: Well I mean the ingredients are in place at least in the views of both Jefferies and also Barclays analysts. But the big question this morning is whether or not the Federal Reserve will be more aggressive and instead of going with the 50 basis points that its been messaging for the last six weeks whether or not they will go with a 75 basis point hike. Now, what you're looking at right here are the Fed funds futures pricing. This is essentially the betting markets for how traders think the Federal Reserve might move in the next meeting. And you could see that right now the expectation is a 71% probability that the Fed will go with that 50 basis point increase in Wednesday's meeting that we've been hearing of.
But this is what we're watching here, the 75 basis point increase 0.75%. You're seeing markets pricing in a 29.2% chance of this. And I want to reference this by noting that before the inflation print that showed the highest pace of price increases since March of 1981, we got that on Friday morning. The odds of a 75 basis point increase were only 3%. So after the Wall Street notes that we saw on Friday into today warning of the possibility of a 75 basis point increase, we're seeing markets very much priced in the odds of the Fed abandoning the fact that they literally said they would be doing 50 basis points in not only June but also in July.
Now of course, the reason for all this is because of inflation and what we're looking at here comes from the New York Fed. This was actually released this morning that shows American household expectations for where inflation will be over the next year. It clocked in 6.6%. This is the highest reading that they have ever collected in the history of the survey. Although to be fair it only goes back to 2013. If there is higher inflation, Fed's got to get more aggressive on interest rate hikes. It'll be interesting to see how the Fed chairman balances that 50 basis point hike if it is indeed the case on Wednesday with messaging on wanting to be more aggressive down the line guys.
- All right. Thank you to our very own Brian Cheung for that update.
