Despite Bear Market, Fed Expected To Hike Aggressively Next Month

Despite many indices and bonds now in bear market territory, the Fed still looks on course for a double or even triple growth next month, according to market futures. It looks like economic data has a better chance of changing the Fed’s trajectory than volatility in the markets.

June Hike

According to the CME’s FedWatch tool, the Fed’s upping rate in futures markets ranges from 50 bps to 1.25%-1.5%, with a one in ten chance of a 75 bps increase. These are bigger steps than the Fed’s usual 25bps adjustment of rates, signaling that the Fed is serious about controlling inflation.

and beyond

This is followed by a move of potentially another 50 bps in July and a 25 bps increase in each of the remaining 2022 Fed meetings based on market futures. The fed funds rate will be slightly below 3% at the end of the year, compared to just under 1% currently. The last time the Fed rate was higher than 3% was in early 2008, when rates were going down instead of up, just before the Great Recession.

data dependency

However, the Fed is heavily data dependent in making its decisions. The recession is not part of the Fed’s plan, and it is a scenario the stock market is increasingly concerned about. So can the Fed change course?

inflation

We will see another inflation report on June 10, a week before the Fed meeting, and it could shed light on whether US inflation peaked in March, and more importantly, core inflation in the US over the medium term. How does it look? Many people expect inflation to fall below the current level of just over 8%, but the Fed’s target for inflation is 2%, so the concern is that if inflation does fall, it will do so without aggressive Fed action. Not enough will fall. Hence those big potential rate hikes.

Unemployment

The other leading indicator the Fed will be watching is unemployment. Currently, unemployment for the US is at a very low 3.5%. This gives the Fed the comfort it can raise rates for now without hurting the economy.

However, inadvertently Netflix
NFLX
small trimmed and meta and snap The plan is to slow down the appointments. These are hardly signs that the hot jobs market will reverse. for example, Intel is easing its hiring rules in an effort to find employees, Yet it is something the Fed will be watching closely. If the job market turns, they may feel less confident in raising rates so aggressively.

Valuation

There were many indications that US stocks in particular were at relatively higher valuations than in history, so the Fed may not be worrying as much about a falling stock market. Especially with US inflation exceeding 8%.

Still, if the stock market collapse has an impact on the real economy and starts to slow the job market, the Fed may adjust its course. For now, there are not many indications of this, although there is still some important data to be released ahead of the Fed meeting next month. A falling stock market means that some of that data may be less good than expected.