Today, the US Federal Reserve will announce the results of the FOMC meeting. A press conference with Fed Chair Jerome Powell will take place half an hour later. The regulator is expected to raise the federal funds rate by 75 basis points. The CME FedWatch tool showed an 84% probability of a 75-basis-point increase and a 16% chance of a full percentage point increase.
Yet, the chances that the Fed will raise the rate by 1% are very low. If so, this step will exert strong pressure on the market. According to MarketWatch, economists at Nomura Securities brokerage firm were the first on Wall Street to predict a full-percentage-point increase in the interest rate.
If the Fed raises the rate by 75 basis points in line with markets' expectations, there may be a wave of profit taking on short positions.
The hard truth is that despite four consecutive rate hikes that were initiated in March, inflation in the US remains extremely high and stable. The fresh data showed that the CPI dropped slightly to 8.3% in August from 8.5% in July. While the CPI has slightly declined, the so-called core CPI that excludes food and energy costs increased by 0.6%, which is almost twice as high as was in the previous month. This brought the core inflation to 6.3% in August, up from the previous reading of 5.9%.
Since the core inflation for August is three times higher than the Fed's target of 2%, the Fed officials will pursue the exceedingly hawkish tone expressed at the Jackson Hole Economic Symposium.
Given the red-hot and persistent core inflation, market participants may expect further rate hikes at the remaining FOMC meetings in September, November, and December.The CME's FedWatch tool is forecasting that there is a 38.9% probability that the Fed will raise rates to between 400 and 425 basis points and a 44.8% probability that rates will be between 425 and 450 basis points by December 2022.
In his speech last month, Jerome Powell acknowledged the severe fallout of the measures aimed at reducing inflation. "The Fed's drive to curb inflation by aggressively raising interest rates would bring some pain," he said.