They are putting an 18% chance on a dramatic full-point hike, a move that would shock the markets and reinforce the narrative that the Fed will do whatever it takes to keep inflation in check.
Yet the Fed also knows that it takes a while for past rate hikes to fuel the system. And if his playbook is too harsh, it could trigger a damaging recession and widespread economic pain, as well as reduce his options for future dating.
“The faster the Fed raises rates, the more likely they are to make a mistake,” Gennadiy Goldberg, senior US rate strategist at TD Securities, told me.
Since then, some credibility has been restored. Bond market expectations for long-term inflation have dropped dramatically in recent months, a sign that these investors think the Fed is doing its job.
Take a look: Compare the yield on standard US Treasury bills to inflation-protected ones. The difference, known as the break-even rate, tells you how much inflation investors are expecting.
The five-year break-even rate stands at 2.48%, down sharply from its March high of 3.59% and not far from the Fed’s 2% target. The 10-year break-even inflation rate is stands at 2.4%.
“A lot of this has to do with the Fed’s very aggressive tone and their promise to keep rates of increase until inflation is back under control,” Goldberg said.
However, he warned that it is too early to “declare the mission accomplished”.
“It’s a tenuous restoration of that trust and that trust in the Fed,” Goldberg said. “The difficulty now is that the Fed has to carry out. It is easy to promise to be aggressive or to be very aggressive in the pace of the tightening policy, but at the end of the day you are really forced to deliver that tightening.”
Dollar hits new 20-year high as Putin escalates war
The latest: in a televised national speech on Wednesday, President Vladimir Putin announced an immediate partial mobilization of Russian citizens and threatened to use “all means at our disposal” to defend Russia “and our people”. He also referred to the potential use of nuclear weapons.
The speech pushed the greenback up 0.4% against a basket of major currencies at its highest level since 2002. Investors often seek safe haven in US dollar assets during times of geopolitical tension.
Oil prices have also risen. Futures on Brent crude, the global benchmark, gained more than 2%, climbing to just under $ 93 a barrel.
The war has exacerbated the stress for investors, as it makes it more difficult to predict when inflation will fall and could push central banks to stick to an aggressive strategy for longer.
It also adds to the uncertainty about energy supplies. While gas reserves in Germany have been filled to 90% of capacity, concerns remain.
Robert Habeck, Germany’s minister of economic affairs, said the country could “get through the winter well” without Russian gas, but warned of “really empty” supply levels in the aftermath.
And the costs are rising. Germany nationalized its gas giant Uniper on Wednesday after a bailout attempt failed to sustain the utility.
On the radar: Kremlin-backed authorities in eastern and southern Ukraine have announced they will hold referendums on joining Russia this week. This could mark another pivotal point in the conflict.
The “king SPAC” loses the crown
Now, even the outspoken venture capitalist is facing the consequences.
Palihapitiya announced Tuesday that it would liquidate two SPACs after they failed to find companies to merge with. All funds raised will be returned to shareholders.
“Ultimately, closing a deal would have required us to stretch the price or buy an inferior asset, or the things we felt comfortable doing,” Palihapitiya said. She also said she saw “resistance from management teams who were either unprepared or unwilling to take on public markets in the face of the current volatility”.
Step Back: Palihapitiya has been a major supporter of the SPACs and has created a cult following among everyday investors. Yet his approach to investing took a turn this year when the markets were hit, a sign of how quickly the fortunes on Wall Street have changed.
- US Existing Home Sales for the August post at 10am ET.
- The Fed makes its last political announcement at 2pm ET, followed by a press conference with President Jerome Powell.
Coming tomorrow: the latest policy decisions from the Bank of England, the Bank of Japan and the Swiss National Bank.