Stocks Week: Another big rate hike is coming. Lather. clean up repeat

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The Federal Reserve’s meeting on Wednesday will be one for the history books. The Fed will raise rates by three-quarters of a point for the third time in a row to 3%, or an unprecedented one percentage point increase to 3.25%.

But what happens after that is anyone’s guess.

Wall Street is divided on whether the Fed will continue to raise rates aggressively in November or whether inflationary pressures will cool enough for the central bank to slow down a bit.

Accordingly, experts’ forecasts for the Fed’s short-term key rate after the November meeting range from 3.5% to 4%. The outlook is even murkier for December, with economists predicting rates could be as low as 3.75% or 4.5%.

The Fed’s big problem: The economy seems to be running a little too hot for its liking. Inflation is certainly a big issue, but the job market is strong, consumers are still spending healthily, and home prices remain high despite a sharp rise in mortgage rates.

“This data will likely encourage the Fed to continue to overdrive, but it also increases the chances of a policy blunder sooner or later, tightening financial conditions too much to combat inflation,” said Timothy Chubb, chief investment officer at Girard. a report

In other words, the Fed’s rate hikes could ultimately lead to the economy cooling more than the central bank would like.

Too big a rate hike risks “sending the economy into a mild recession,” Chubb said. But it does not predict a major economic collapse like the one in 2008. It’s likely to be “of the 2001 recession variety, hardly the worst outcome of a soft landing.”

Even if the economy avoids a major downturn, there is growing concern that the stock market – which has already had a rough 2022 – may suffer longer.

Investors are uncertain about where rates might be by the middle of next year, with forecasts for July 2023 ranging from a low of 3.25% to a high of 5%. In addition, other central banks, especially the European Central Bank, may also increase the pace and size of rate hikes. This will lead to more market volatility.

“Major central banks still have work to do on inflation, including the Fed and the ECB. Recession fears provide a weaker backdrop for global risk assets, and the global outlook remains abnormally uncertain,” Luigi Speranza, chief economist and global head of BNP Paribas Markets 360, said in a report.

Speranza said a recession in Europe is “inevitable.” And although it is not “deep”, Speranza believes that it will be “extended”. Regarding the US, he said that “the macro outlook is less negative than in Europe” but that “restrictive policy and below-trend growth are needed to control inflation”.

It all serves as a rude awakening for investors, who were hoping that Fed Chairman Jerome Powell might finally clip his inflationary wings and start fluttering like a monetary policy dove.

But unless the pace of consumer price increases begins to cool much faster and more significantly in the coming months, the Fed will not be able to slow the pace of rate hikes anytime soon. And forget about expectations that the Fed will pause in 2023 and start signaling rate cuts.

The Fed, as Powell likes to say, depends on the data. And so far, it looks like all the data points to more increases and rates will last longer.

“This meeting will be very important given all the latest data,” said Roger Aliaga-Díaz, chief Americas economist and head of portfolio construction at Vanguard. “It’s too early to talk about a pivot.”

The Great Recession may have happened nearly fifteen years ago, but lawmakers are still keeping a close eye on America’s major banks to make sure those companies stay financially healthy, and they’re also acting responsibly.

The CEOs of seven of America’s largest lenders will appear before the House Financial Services Committee on Wednesday and before the Senate banking committee on Thursday. Home audience headline? “Holding Megabanks Accountable: Oversight of America’s Biggest Consumer-Faced Banks.”

JPMorgan Chase ( JPM ) CEO Jamie Dimon, Citi’s ( C ) Jane Fraser and Bank of America ( BAC ) Chief Brian Moynihan will testify and be subject to questions from Congress. Executives from Wells Fargo ( WFC ), Truist ( TFC ), PNC ( PNC ) and US Bancorp ( USB ) will also be in attendance.

The types of questions that may be affected are: Do banks that have built up reserves in recent years have enough of a financial cushion to deal with the possibility of delinquencies and defaults if consumers can’t make their mortgage and credit card payments on time? What are big banks doing to address growing concerns about fraud on their Zelle digital banking platform, which competes with PayPal’s ( PYPL ) Venmo and Block’s ( SQ ) Cash app?

Lawmakers are also likely to meet with bank executives on other issues, including rates, predatory lending and broader concerns about the economy and housing market.

Monday: UK stock market closed for Queen Elizabeth II’s funeral; AutoZone’s (AZO) earnings

tuesday: US housing starts and building permits; Earnings from Stitch Fix (SFIX).

Wednesday: Fed interest rate decision; US home sales; General Mills ( GIS ), Lennar ( LEN ), KB Home ( KBH ), and Trip.com ( TCOM ) profit

Thursday: Bank of England interest rate decision; US Weekly Jobless Claims; Earnings for Accenture (ACN), Darden Restaurants (DRI), Manchester United (MANU), Costco (COST), and FedEx (FDX)

Friday: UK emergency budget for energy crisis