They see an 18% chance of a sharp rise, a move that would shock markets and support the claim that the Fed will do whatever it takes to control inflation.
However, the Fed also knows that past rate hikes take a while to get through the system. If its playbook is too tough, it could trigger a damaging recession and widespread economic pain, and reduce options for future meetings.
“The faster the Fed raises rates, the more likely they are to make mistakes,” Gennady Goldberg, senior U.S. rates strategist at TD Securities, told me.
Since then, some credibility has returned. Bond market expectations for longer-term inflation have fallen sharply in recent months, a sign that these investors believe the Fed is doing its job.
Take a look: Compare yields on standard U.S. Treasuries with those that are inflation-protected. This difference — known as the break-even ratio — tells you how much inflation investors expect.
The five-year breakeven rate was 2.48%, well below the March high of 3.59% and not far off the Fed’s 2% target. The 10-year breakeven inflation rate is 2.4%.
“A lot of it has to do with the Fed’s very hawkish tone and their commitment to keep raising rates until inflation is back under control,” Goldberg said.
However, he cautioned that it was too early to “declare the mission complete”.
“The restoration of that confidence and confidence in the Fed is very fragile,” Goldberg said. “The difficulty now is that the Fed has to stay the course. It’s easy to commit to being hawkish or very aggressive in the pace of tightening, but in the end you’re really forced to tighten.”
U.S. dollar hits 20-year high as Putin escalates war
UPDATE: In a nationally televised address on Wednesday, President Vladimir Putin announced the immediate partial mobilization of Russian citizens and threatened to use “every means at our disposal” to defend Russia “and our people.” He also mentioned the potential use of nuclear weapons.
The remarks pushed the dollar up 0.4 percent against a basket of major currencies to its highest level since 2002. During times of geopolitical tension, investors typically seek safe havens in U.S. dollar assets.
Oil prices also rose. Brent crude futures, the global benchmark, rose more than 2 percent to just under $93 a barrel.
The war has added to investor pressure as it makes it harder to predict when inflation will ease and could prompt the central bank to maintain an aggressive strategy for longer.
It also increases uncertainty about energy supply. Although Germany’s natural gas reserves have reached 90%, there are still concerns.
German Economic Affairs Minister Robert Habeck said the country could “get through the winter well” without Russian gas, but warned that supply levels were “really empty” in the period after that.
And costs are rising. Germany nationalized its gas giant Uniper on Wednesday after an attempted bailout failed to prop up the utility.
On the radar: Kremlin-backed authorities in eastern and southern Ukraine have announced they will hold a referendum this week on joining Russia. This could mark another key point in the conflict.
‘King of SPACs’ loses his crown
Now, even outspoken venture capitalists are grappling with the consequences.
Palihapitiya announced Tuesday that he would close the two SPACs after they failed to find a company to combine. Any funds raised will be returned to shareholders.
“Ultimately, getting the deal done will require us to raise prices or buy inferior assets — and that’s not something we’re comfortable with,” Palihapitiya said. He also said he’s seeing “resistance from the management team, who are either unprepared, Either don’t want to face the public markets with the current volatility.”
Taking a step back: Palihapitiya is one of the main proponents of SPACs and has built a cult following among everyday investors. However, his approach to investing has taken a hit this year as markets have been battered, showing how quickly fortunes on Wall Street have changed.
Next
Today is also:
- US existing home sales for August are released at 10 am ET.
- The Fed makes its latest policy announcement at 2 p.m. ET, followed by a news conference with Chairman Jerome Powell.
Coming tomorrow: The latest policy decisions from the Bank of England, the Bank of Japan and the Swiss National Bank.
