Pre-market trading: Late in the game. Has the Fed Risked a Hail Mary?

What’s Happening: New inflation data on Tuesday showed that prices are not falling as quickly as Wall Street had hoped. Markets tumbled after the report fueled fears that the central bank and Chairman Jerome Powell would decide to raise rates more aggressively, causing severe economic pain.

Tuesday’s alarming inflation report came just before Federal Reserve officials meet to make their next decision on interest rates, signaling to markets that the Fed will not be taking off the accelerator anytime soon in its battle to moderate rising prices.

Odds for a full point increase hover around 25% following the inflation report, up from 0% a week ago. Economists at brokerage Nomura Securities revised their forecast from 75 basis points to 100 basis points.

Former Treasury Secretary and Harvard president emeritus Larry Summers wrote on Twitter that he doesn’t think gradual increases in interest rates are driving down high prices. The Fed has raised rates four times already this year, and inflation remains near 40-year highs.

Markets could also surprise the upside if they get confirmation that the Fed is taking inflation seriously, Summers said. Better to take a “rip off the bandaid” approach. He added, “I would choose a move of 100 basis points to strengthen the credibility.”

But interest rate hikes are often frowned upon by markets, which can have a negative impact on earnings and stock prices.

A percentage point increase would also push the federal funds rate toward what the Fed considers a restrictive limit, where it says economic growth tends to slow and the unemployment rate tends to rise. This limits the Fed’s chances of a soft landing, a Goldilocks situation where the Fed cools the economy enough to lower inflation but not enough to cause a recession.

Still, some economists think the volatile market is a good thing, and at least one Fed official agrees.

Minneapolis Fed President Neel Kashari said last month that he was happy markets were in the doldrums after Powell warned he would be in pain. That meant people understood the seriousness of the Fed’s commitment to return inflation rates 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 up to that.”

Higher bond yields, lower stock prices and credit spreads that make borrowing more expensive for companies with weaker balance sheets are necessary to tighten financial conditions.

Bottom line: The Federal Reserve is unlikely to raise rates by a full percentage point next week. The consensus among economists and Wall Street analysts is still a 75 basis point increase, and Powell likes to communicate and prepare markets for any change.

But that doesn’t mean there won’t be a bigger increase heading into the November meeting.

“I wouldn’t discount a 100 basis point rate hike,” Marvin Loh, chief strategist at State Street, told me. “Just a few months ago a 50 basis point increase seemed unthinkable.”

The railway strike was averted after marathon talks

Unions and management reached a tentative deal early Thursday to avert a freight rail strike that threatened to disrupt U.S. supply chains and raise prices for many commodities.

The agreement with unions representing more than 50,000 engineers and managers was announced shortly after 5 a.m. in a White House statement that it called “an important victory for our economy and the American people.”

It came after 20 hours of talks between union leadership and railroad labor negotiators organized by Labor Secretary Marty Walsh. The meeting began on Wednesday morning, with the strike clock set to begin at 12:01 a.m. on Friday.

Watch this space: The deal does not mean the threat of a strike has completely disappeared. The agreement must be ratified by union members.

But it’s good news for the wide range of businesses that depend on freight railroads to keep operating and for the broader U.S. economy. About 30% of the nation’s freight is moved by rail.

Few details of the deal have been released so far. But President Joe Biden’s statement indicated that the main issue that brought the country within a day of its first national rail strike in 30 years was the union’s side.

“This is a victory for the tens of thousands of railroad workers who worked tirelessly throughout the pandemic to ensure that America’s families and communities got the delivery of what has carried us through these difficult years,” Biden said. “These rail workers will get better pay, better working conditions and peace of mind about health care costs – all hard-earned.”

The world’s second largest cryptocurrency just got greener

Ethereum, the world’s second most valuable cryptocurrency, has completed a massive software upgrade that its backers claim will reduce its carbon footprint.

The latest: The long-awaited innovation 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 ran on a so-called “proof-of-work” mechanism, which required high-powered computers to solve complex puzzles. The merger moves ethereum to a mechanism called a “proof game,” which is much more energy efficient, CNN Business contributor Diksha Madhok reports.

“Happy reunion everyone,” Vitalik Buterin, the 28-year-old Russian-Canadian programmer who helped create Ethereum, said on Twitter. “This is a big moment for the Ethereum ecosystem. Everyone who helped bring it together should feel very proud today.”

According to the co-founder, the renovation “will reduce the world’s electricity consumption by 0.2%”.

Although cryptocurrencies have seen a dramatic rise in recent years, observers say they are terrible for the environment. A single Ethereum transaction is equivalent to the weekly energy consumption of an average US household, according to Digiconomist.

Investor’s View: Ethereum is down more than 1% in the last 24 hours. But analysts believe it could drive adoption in the long term, especially for investors trying to align their portfolios with broader environmental goals.

the next

Adobe (ADBE) reports earnings after the bell.

Also today: US retail sales will arrive at 8:30 a.m. in August. Industrial production data at 9:15 a.m. ET.

Coming tomorrow: a first look at the University of Michigan consumer sentiment survey for September.