Just months ago, investors worried the Federal Reserve was not fighting inflation aggressively enough. Several jumbo rate hikes later, some now fear the Fed will plunge the economy into recession by tightening monetary policy too quickly.
With markets reeling from last week’s robust inflation number, interest rate futures late Friday were pricing in a roughly 20% chance that the Fed will raise rates by 100 basis points at its Sept 21 meeting. That number was all but unthinkable earlier this month, when the market was debating whether the move would be 50 or 75 basis points. Investors are also pricing in meatier rate hikes down the road, with the terminal rate for U.S. fed funds now at 4.4%.
Worries of Fed tightening have already contributed to a 19%decline in the S&P 500 this year. Global bonds have fallen sharply, helped by a steep selloff in Treasuries.Fed Chairman Jerome Powell has said price pressure can be lowered without a sharp economic slowdown. He has also emphasized, however, that the central bank will be relentless in its fight to stamp out inflation."Central banks are facing much sharper tradeoffs.
“Overtightening would come with material economic pain ... risk and liquidity stress,” said Daniela Mardarovici, co-head of multi-sector fixed income at Macquarie Asset Management.Andrew Patterson, senior international economist at Vanguard, believes it may be preferable for the Fed to err on the side of aggressive action, given how stubborn inflation has been. The firm neverthelessSome investors think the economy may be resilient enough to withstand a more aggressive Fed. U.S.
Market signals have been more worrying, however, including the inversions of various parts of the Treasury yield curve - a phenomenon that has preceded past recessions. Foreign exchange trading pioneer John Taylor, CEO of Taylor Global Vision, is among the investors betting there will be more pain ahead in coming months.“The equity market will get crushed and bring on a recession,” said Taylor, who is betting on more declines in the tech-heavy Nasdaq Composite Index. “This is overkill.
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