Markets are turning their attention today to the Fed meeting. Markets expect the Federal Open Market Committee (FOMC) to deliver another aggressive rate hike at its upcoming meeting on July 26-27. Most economists and investors believe the central bank's Federal Open Market Committee will raise interest rates by 75 basis points, at the FOMC’s two-day meeting in Washington, D.C.
US inflation roared again to a fresh four-decade high last month, likely strengthening the Federal Reserve’s resolve to aggressively raise interest rates that risks upending the economic expansion. The consumer price index rose 9.1% from a year earlier. Economists projected a 1.1% rise from May and an 8.8% year-over-year increase, based on the Bloomberg survey medians. This was the fourth-straight month that the headline annual figure topped estimates. The core CPI, which strips out the more volatile food and energy components, advanced 0.7% from the prior month and 5.9% from a year ago, above forecasts.
The June CPI print is ugly across the board This is bad news for risk assets as it increases the likelihood that the Fed will keep raising rates rapidly and end up overshooting by enough to push the economy into recession. The higher and faster the Fed goes increases the risks for a potential US recession, which several economists see in the next 12 months.
Federal Reserve Chair Jerome Powell is likely to slow the pace of interest-rate increases after front-loading policy with a second straight 75 basis-point hike today, economists surveyed by Bloomberg said. They expect the Federal Open Market Committee to lift rates by a half percentage point in September, then shift to quarter-point hikes at the remaining two meetings of the year. That would lift the upper range of the central bank’s policy target to 3.5% by the end of 2022, the highest level since early 2008.
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Swap traders betting on Fed policy are now leaning toward a 50 basis-point hike in September as more likely than a 75 basis-point move, following weak US economic data earlier on Friday. US business activity contracted in July for the first time in more than two years as manufacturers and service providers signaled sluggish demand that only adds to heightened recession anxieties. The S&P Global flash composite purchasing managers output index slid 4.8 points to 47.5, the weakest reading since May 2020, the group reported Friday. Outside of the early months of the pandemic, the July figure is the weakest in data back to 2009. Readings below 50 indicate contraction. The new orders gauge expanded modestly after contracting the previous month.
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US inflation may be close to a peak, but it’s very likely to stay above 8% through year-end. Bloomberg Economics’ model assigns zero probability to a drop below 4% in 2023. Taken together with increasing recession risks, the Fed faces a tough balancing act as it attempts to bring stubborn price pressures under control without tipping the economy into contraction.
The Fed has made it clear it is prepared to sacrifice growth as it desperately tries to get a grip on inflation via higher interest rates. This is also contributing to the strongest dollar in 20 years, which will hurt international competitiveness.
US GDP contracted in the first quarter and trackers of economic activity, such as the popular Atlanta Fed indicator GDPNow suggest it will do so again in the second quarter when data are released on July 28. However, apart from a possible negative GDP print, many indicators suggest the economy is still expanding.
On Thursday we’re going to get the first reading of second-quarter GDP in the US, and it’s possible that we’re going to see a second consecutive quarter of negative growth.
Bank of America Corp. economists has joined Wells Fargo Investment Institute and Nomura Holdings Inc. in expecting a US recession in 2022. BofA forecasts a “mild” downturn, saying services spending is slowing and hot inflation is spurring consumers to pull back.
The 2-year Treasury yield popped Wednesday while its 10-year counterpart fell, pushing the so-called inversion between the two to its biggest level since 2000. Yield-curve inversions are seen by many on Wall Street as signals that a recession lies on the horizon.
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