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Investors are in the balance as the Federal Reserve prepares for its policy decision next week. Some are even starting to prepare for a big surprise.
What’s Happening: Tuesday’s new inflation data showed that prices aren’t falling as quickly as Wall Street hoped. Markets collapsed as the report fueled fears that the central bank and President Jerome Powell would decide to hike rates more aggressively, inflicting severe economic damage.
Tuesday’s alarming inflation report was the latest before Federal Reserve officials gathered for their next interest rate decision, and signaled to markets that the Fed will not take its foot off the accelerator in its struggle to moderate price increases at any time.
According to CME FedWatch data, investors are putting the odds of a three-quarter percentage point hike next week at 75%. But some financial bigwigs have begun to discuss a scenario where the Fed raises rates by a full percentage point for the first time in its modern history.
In the wake of the inflation report, the odds for a full point hike are hovering around 25%, up from 0% a week ago. Nomura Securities brokerage economists changed their forecasts from 75 basis points to 100 basis points.
Larry Summers, the former Treasury Secretary and Harvard president emeritus, tweeted that he doesn’t think gradual interest rate hikes have worked to bring down high prices. The Fed has already raised rates four times this year and inflation remains close to the highs of the last 40 years.
Markets could also surprise on the upside if they were reassured that the Fed is taking inflation seriously, Summers said. It’s best to take a “scrub the patch” approach. He added: “I would choose a 100 basis point move to strengthen credibility.”
But markets are often unwilling to accept interest rate hikes, which can negatively impact earnings and share prices.
A one percentage point hike would also push the federal funds rate into what the Fed considers a tight range, where it says economic growth tends to slow and unemployment rates tend to rise. This limits the Fed’s chances of making a soft landing, Goldilocks situation where the Fed cools the economy enough to lower inflation but not enough to cause a recession.
However, some economists think that upsetting the markets is a good thing, and at least one Fed official agrees.
Minneapolis Fed Chairman Neel Kashari said last month he was happy the markets failed after Powell warned of upcoming pain. It meant that people understood the seriousness of the Fed’s commitment to bring inflation rates back to 2%, he said.
The Fed wants “a weaker stock market. They want higher bond yields, “former New York Federal Reserve Chairman Bill Dudley told my colleague Matt Egan last month.” I think the stock market is finally catching on. ”
To tighten financial conditions, higher bond yields, lower stock prices and widening credit spreads are needed, making debt more expensive for companies with weaker balance sheets.
Bottom line: The Federal Reserve is unlikely to raise rates by a full percentage point next week. The consensus between economists and Wall Street analysts is still for a 75 basis point hike and Powell loves to communicate and prepare markets for any changes.
But that doesn’t mean a larger hike won’t come at the November meeting.
“I wouldn’t discount a 100 basis point rate hike,” Marvin Loh, a senior strategist at State Street, told me. “It’s only been a few months since a 50 basis point hike seemed unthinkable.”
Unions and leadership reached an attempted deal Thursday that averted a freight rail strike that had threatened to cripple US supply chains and push higher prices for many goods.
The deal with unions representing more than 50,000 engineers and conductors was announced shortly after 5am ET in a statement from the White House, which called it “a major victory for our economy and the people. American”.
It came after 20 hours of talks between union leadership and railway labor negotiators hosted by Labor Secretary Marty Walsh. They began their meeting Wednesday morning with the ticking time until a strike was to begin at 12:01 am ET on Friday.
Look at this space: the deal does not mean that the threat of a strike has completely disappeared. The agreement must be ratified by the union members.
But that’s good news for a wide range of companies that depend on freight railways to continue operating and for the US economy in general. About 30% of the nation’s freight travels by rail.
Few details of the deal have been made public so far. But President Joe Biden’s statement indicated that the main issue that had brought the country within a day of its first national rail strike in 30 years was being addressed in favor of the unions.
“It is a victory for tens of thousands of railroad workers who worked tirelessly during the pandemic to ensure that American families and communities received deliveries of what kept us going through these difficult years,” Biden’s statement said. “These railroad workers will receive better pay, better working conditions and peace of mind on health care costs – all hard earned.”
Ethereum, the second most valuable cryptocurrency in the world, has completed a massive software update that its supporters say will reduce its carbon footprint.
The latest: the long-awaited renovation, known as “The Merge,” will reduce Ethereum’s energy consumption by nearly 99.95%, according to the Ethereum Foundation, a non-profit organization dedicated to supporting cryptocurrency and related technologies.
Until now, both ethereum and bitcoin worked on a mechanism called “proof-of-work”, whereby high-powered computers were required to solve complex puzzles. The merger shifts ethereum onto a mechanism called “proof-of-stake,” which is much more energy efficient, reports my CNN business colleague Diksha Madhok.
“Happy to unite everyone,” Vitalik Buterin, the 28-year-old Russian-Canadian programmer who helped create Ethereum, said on Twitter on Twitter. “This is a great time for the Ethereum ecosystem. Everyone who helped bring about the merger should feel very proud today.”
The co-founder said the upgrade “will reduce global electricity consumption by 0.2%”.
While cryptocurrencies have seen a phenomenal rise in recent years, observers say they are terrible for the environment. According to Digiconomist, a single Ethereum transaction equates to the weekly energy consumption of an average US household.
Investor Insight: Ethereum has fallen more than 1% in the past 24 hours. But analysts think it could increase long-term adoption, especially for investors looking to align their portfolios with broader environmental goals.
Adobe (ADBE) reports earnings after the bell.
Even today: US retail sales for August arrive at 8:30 am ET. Industrial production data follows at 9:15 am ET.
Coming tomorrow: A first look at the University of Michigan Consumer Sentiment Survey for September.