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Fed Expected To Raise Rates To Levels Not Seen Since Before Great Recession: What You


The SPDR S&P 500 SPY is sliding Tuesday as the Federal Reserve kicks off its two-day policy meeting, which is expected to feature another large rate hike.

What To Know: Fed officials are set to release their latest projections on Wednesday, which most expect will be accompanied by a 0.75% hike in the benchmark rate for the third time in a row.

The Fed is also likely to signal that it plans to raise and hold the benchmark rate above 4% in the coming months.

The central bank is fighting the hottest inflation numbers in more than 40 years. Fed officials hiked interest rates by 0.75% for the second consecutive month in July, bringing its target fed funds rate up to a range of 2.25% to 2.5%. A third straight 0.75% hike would bring rates up to levels that have not been seen since before the 2008 financial crisis.

Related Link: Elon Musk Calls Out Fed For Too Much Latency In Rate Decisions Ahead Of Tuesday’s Meeting: ‘Problematic In A Fast-Changing World’

What Economists Expect From Fed: Most of the conversation has been centered around a 0.75% hike or a lesser 0.5% hike from the Fed, but some analysts are anticipating an even more aggressive 1% rate hike after the Labor Department reported an 8.3% year-over-year increase in the consumer price index for August, which came in above average economist estimates of 8%.

“The problem with the August CPI print was not signs of the inflation problem getting worse. The problem was no sign the inflation problem is getting better,” said Jonathan Pingle, chief U.S. economist at UBS.

Last week’s CPI inflation data could act as a confirmation of recent indicators and push the Fed to be more aggressive, but most still think a 1% hike is unlikely. 

According to a Wall Street Journal report, former senior Fed economist William English doesn’t believe one month of data is likely to swing the Fed to be that aggressive.

“They would only go for 100 if they saw a fundamental change in where they thought the economy and inflation were going, and I doubt one month’s data was enough to do that. You could do 100 if you really wanted to stamp your foot and say, ‘This is unacceptable.’ To me, it doesn’t seem like they need it,” English said.

A new CNBC Fed survey shows that average expectations are for the Fed to hike rates 0.75% at Wednesday’s meeting. Fed officials are also expected to keep hiking until the rate peaks in March 2023 at 4.26%.

“The Fed has finally realized the seriousness of the inflation problem and has pivoted to messaging a positive real policy rate for an extended period of time,” John Ryding, chief economic advisor at Brean Capital, wrote in response to the survey.

The Last Word: A majority of survey respondents do not expect inflation to return to the Fed’s 2% target for several years, but Jim Paulsen, chief investment strategist at The Leuthold Group, is more optimistic. 

“All the Fed has to do to enjoy a soft landing is stand down after raising the funds rate to 3.25%, allow real GDP growth to remain positive, and take all the credit as inflation declines while real growth persists,” Paulsen said.

The Fed decision on rates is due Wednesday afternoon at 2 p.m. ET.

SPY Price Action: The SPY was down 1.38% at $383.17 Tuesday afternoon, according to Benzinga Pro.

Photo: Rafael Saldaña from Flickr.



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