Fed Expected to Raise Rates Wednesday as Inflation Stays Hot, and Stocks May Rise Anyway
Traders have priced a 90% probability that the Federal Reserve will lift its benchmark federal funds rate by a quarter percentage point at its September 15-16 meeting, according to CNBC, which would push the target range to 3.75%-4.00%.
That shift follows a string of elevated inflation readings and a spike in crude oil prices driven by the ongoing war with Iran. Analysts say stocks could actually gain on the news.
A Reuters poll conducted September 4-9 found roughly 70% of the 93 economists surveyed still expected no change at the September meeting, but that share had fallen sharply from 90% in August.
The proportion forecasting at least one hike this year had more than doubled compared with the previous survey period. Eli Nir, U.S. economist at TD Securities, told Reuters the central bank would likely move quickly if inflation data surprised to the upside.
The August consumer price index, released Friday September 11, showed prices for gasoline, food and other everyday goods running 3.4% above year-ago levels, according to AP reporting via KFOR.
That figure landed close to economist forecasts but remains well above the Fed's 2% target. Brian Jacobsen, chief economic strategist at Annex Wealth Management, told the AP that in monetary policy, symbolism can outweigh substance.
Why Equities Could Rally on a Rate Increase
The counterintuitive market dynamic stems from where pressure has built in bond markets.
On September 14, the 10-year Treasury yield reached 5% for the first time since 2023, a level that has historically weighed on stock valuations by making future corporate earnings worth less in today's dollars.
Scott Ladner, chief investment officer at Horizon Investments, told CNBC that the potential upside for equities depends on the net effect a rate hike would have on longer-dated Treasury yields.
If a hike persuades bond investors that inflation will be controlled, long-term yields could actually pull back, relieving pressure on stocks even as short-term borrowing costs rise. That, Ladner said, is what makes the current environment unusual.
How Fed Chair Warsh's Tone Could Shift the Outcome
Fed Chairman Kevin Warsh delivered a notably firm anti-inflation message at the Jackson Hole symposium on August 28, reversing a more ambiguous stance from the Fed's July meeting.
Warsh has made a practice of withholding forward guidance on rates, a posture that has, according to Reuters, eroded economists' confidence in their own forecasts.
Bank of America Securities rates strategist Mark Cabana, as cited by CNBC, laid out two scenarios for Wednesday's press conference.
If Warsh maintains his hawkish tone, Cabana expects two-year Treasury yields to rise 5-10 basis points, a basis point is one-hundredth of a percentage point, while 30-year yields fall by a similar margin.
A more cautious, dovish tone could send longer-dated yields higher and unsettle equity markets.
AI Stocks Face a Separate Risk
Fortune reported that London-based forecaster Capital Economics has warned of a late-stage AI bubble, with senior markets economist James Reilly screening eight categories of market indicators and finding most near levels that historically precede major peaks.
Capital Economics forecasts the S&P 500 could fall at least 30% from its high beginning in 2027.
Behavioral economist Owen Lamont of Acadian Asset Management described recent single-day market swings, including Microsoft gaining $450 billion in market value on July 30, followed by dramatic moves in Apple, Amazon and Meta the next day, as signs of what he called "crazy days" in stock markets.
The moves were hard to ignore.