Is Wall Street underestimating the likelihood that the banks will hold higher rates till the end of this year?
Wall Street and the bond market opened higher Friday morning. Oil prices have increased, and gold is climbing. Next week, investors are expecting the release of the CPI report, which counts as a contributing factor in the Federal Reserve interest hike percentage.
Experts believe that consumer product prices will fall about 0.1% this month. The Federal Reserve is counting on more positive results along with a good job growth report past Friday.
According to Wall Street, the S&P 500 has gained 47 basis points, moving to 4:055.73 points. Tech stocks jumped by 201 basis points, making today’s gains the best of the past two weeks. As for the Dow Jones, its index increased by 1.04%.
The next two weeks will determine the likelihood of the interest rate hike, while the vast majority bet on a 75bps hike.
According to Bullard, the president of the Federal Reserve Bank of St. Louis, the probabilities of a three-quarters interest hike are high. Bullard noted that he is on the side of more aggressive interest hikes. He added that one good piece of data won’t change his mind because he was referring to last Friday’s strong job report. James Bullard thinks that the only way to tame inflation is to insist on their aggressive monetary policies, which include a third 75bp interest
The Federal Reserve had increased its banks’ interest by three quarters for the past two months, June and July, and before by two quarters in March and April.
Bullard’s comments reinforced Jerome’s notes on his speech in Jackson Hole; the FED officials won’t shrink their monetary policy any time soon.
Bullard says that Wall Street and investors are underestimating the FED’s ability to keep increasing interest rates at a higher level.
There is one reason that explains why the FED officials are raising interest rates rapidly, and that reason is that the inflation pressure is closing in on them.
The next meeting is scheduled for September 20–21, when the officials are leaving for a 75bp points hike. But what does that mean for Wall Street?
Generally speaking, a 1% interest hike will usually result in an average 15%–20% decline in stock prices. On top of that, higher interest rates will result in lower yields on bonds. Since August 18, the 10-year bond yield in the United States has risen from 2.75% to around 3.3%.
Higher yield bonds are more likely to cause high mortgage rates and building costs. The U.S. homebuilding industry is already at the bottom, the lowest level over the past 20 years.
Basically, what higher interest rates are doing is causing sharp declines in the Wall Street index and a decline in home sales as well.
Another contributor to the FED’s official decision is energy costs, which are estimated to increase by 0.3% this month. The U.S. is still trying to resolve high energy bills as we head into the coldest season of the year.
From our reading of the data, it’s more likely that the FED officials will hold the higher interest rate level in the next year.