On Wednesday, the U.S. Federal Reserve will raise its federal funds rate. JPMorgan economist Michael Feroli believes rising inflation will force the Fed to increase it by 75 basis points (bps) during its next meeting.
CME Group data last week indicated that 95% of the market expected a 50-bps rate increase in the United States this month. Some expect a Fed that is hawkish, but others believe that the U.S. central banking may be more dovish if markets worsen.
Global Markets Shake With Focus on the Fed’s Next Rate Increase — JPMorgan Economist Expects 75 bps
Major U.S. stock and cryptocurrency indexes fell significantly Monday due to one of the bloodiest start to the week for a while. CNBC’s Scott Schnipper stated Monday that the “S&P 500” is now in a bear market according to S&P Dow Jones Indices.
Precious metals such as silver and gold also saw their value drop. The price of gold per ounce fell 2.67%, while silver’s dropped 3.58%. The crypto economy as a whole lost 18% on Monday, and Bitcoin fell below $21K. All eyes currently are on the Federal Open Market Committee meeting (FOMC), where members of Federal Reserve System will likely raise the federal funds rates.
The Fed can increase the rate of inflation moderately by 25 to 50 basis points. The Fed could increase the benchmark rate by 75 to 100bps at its next meeting, and some predict 75 basis point increases. CME Group data last week showed that the market had priced in a 95% probability that Fed would raise benchmark rate 50 bps. Michael Feroli, JPMorgan’s economist, believes a 75-bps increase is possible and that 100 bps are also possible.
In a Monday note, Feroli stated to clients that there may be a sudden rise in long-term inflation expectations which could prompt the Fed’s decision to raise the rate by 75 basis point on Wednesday. Feroli said that one might wonder if the surprise would be to see the Fed hike 100bp. This is something Feroli believes is a risky proposition.
Economists at Goldman Sachs Predict a 75bps Hike — JPMorgan Strategist Marko Kolanovic Believes that a Dovish Surprise could Happen
Goldman Sachs economists agree to Feroli believing that a 75-bps increase will likely be announced at FOMC. Monday’s explanation by Goldman economists was that the Fed forecast has been revised to include 75bps hikes in June-and-july.
Note from Goldman Sachs analysts to investors:
In 2023, we anticipate two rate increases to 3.75-4%. Then in 2024, one reduction to 3.5-3.75%. For a 3.25-3.5% terminal rate, we expect a 50bp rise in September. We also anticipate 25bp increases for November and December. End-2022, the median dot will be 3.25-3.5%
Despite Feroli’s prediction of 75 bps, JPMorgan’s Marko Kolanovic stated to the press that the U.S. would likely avoid a recession. JPMorgan Chase & Co.’s strategist explained that Fed could be dovish due to the craziness of bond markets and stock market.
“Friday’s strong CPI print, which led to a surge of yields, and the sell-off crypto over the weekend are weighing investor sentiment, driving the market lower,” Kolanovic wrote in a note to clients . The JPMorgan strategist said that rates market repricing was too extreme and that the Fed would surprise us by being dovish relative to the current price of the curve.