Inflation is skyrocketing. Should the Fed Trigger “Shock and Awe”?

By Paul R. La Monica, CNN Business

The Bank of England has already started raising interest rates to fight inflation. The Federal Reserve should follow soon. But how aggressive will the US central bank be?

Investors will be looking for clues when Chairman Jerome Powell holds a press conference after Wednesday’s Fed meeting. Investors do not expect the Fed to intervene this week. It’s more likely to happen in March.

It would be the first time the Fed has changed interest rates since they cut them to near zero at the start of the Covid-19 pandemic in March 2020. The central bank has not raised rates since December 2018.

Higher interest rates make it more expensive for most individuals and businesses to borrow money. This, in turn, leads to a slowdown in consumer and business spending, which generally limits price increases.

Most on Wall Street think the Fed will want to take a slow and steady approach to tackling rising consumer prices. Rising rates too abruptly could harm the economy and lead to further turbulence in a suddenly capricious stock market.

Data from the Chicago Mercantile Exchange shows the market is pricing in an 88% chance of a quarter-point interest rate hike at the March 16 Fed meeting.

But a small faction of traders believe the Fed will raise rates more aggressively. Investors are pricing in a 5% chance that the Fed will raise rates by half a point. (The remaining 7% think the Fed will stay tough.)

Hedge fund manager Bill Ackman tweeted earlier this month that a half point hike by the Fed could help “restore its credibility” as an inflation fighter, as it would be “a surprise move to shock and intimidate the market, which would demonstrate its resolve on inflation”.

“The Fed is losing the battle against inflation and is behind where it needs to be, with painful economic consequences for the most vulnerable,” Ackman added.

Even some bankers are starting to think the Fed might start with a big rate hike.

Bruce Van Saun, CEO of New England-based regional bank Citizens Financial Group, told CNN Business he was hearing more and more about a half-point hike.

Van Saun noted that while this is not yet fully priced into the market, the Fed may want to move more quickly to ease additional inflationary pressures.

Still, most market participants think the Fed can show it’s serious about fighting inflation with lower rate hikes.

“We believe it is unlikely that the central bank will open up the possibility of a [half-point] hiking in March. We would view more frequent upside as the most likely risk,” Luigi Speranza, chief global economist at BNP Paribas, said in a report.

This is exactly what Jamie Dimon, CEO of JPMorgan Chase, expects. Dimon told analysts on the bank’s earnings conference call earlier this month that there was “a good chance of more than four” rate hikes this year – and potentially up to at six or seven.

“This whole notion that somehow it’s going to be sweet and sweet and nobody’s ever going to be surprised…I think that’s a mistake,” Dimon said of current rate hike expectations. slow, progressive and telegraphed.

Get ready for technological gains

Stocks have been volatile during the first part of the earnings season. JPMorgan Chase, Goldman Sachs and other big banks failed to live up to the huge expectations investors had for their results.

But now is the time for the tech sector, which has dominated the market for the past few years, to take center stage.

Investors will get an on-demand reading of cloud computing from IBM and Microsoft.

Chip leader Intel, which has rallied this year despite lingering concerns over semiconductor supply chain issues, is also set to report results. The same goes for Elon Musk’s Tesla and the world’s most profitable company, iPhone maker Apple.

Expectations are high. Wall Street still loves tech stocks, even though the sector and the entire Nasdaq recently fell into correction mode, down more than 10% from record highs.

According to data from FactSet Research, 62% of the ratings given by Wall Street analysts to S&P 500 technology and communications companies are buy ratings.

Following

Monday: Earnings from Philips, Halliburton and IBM

Tuesday: US consumer confidence; Profits from Ericsson, Verizon, Johnson & Johnson, GE, Microsoft, Capital One and Texas Instruments

Wednesday: US New Home Sales: Fed Decision; Earnings from CNN parent company AT&T, Anthem, Boeing, Intel and Tesla

Thusday: US GDP for the fourth quarter; Earnings from Comcast, McDonald’s, Mastercard, Apple, Mondelez and Visa

Friday: personal income and expenses in the United States; Profits from Chevron, Charter Communications, Caterpillar and Colgate-Palmolive

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