A version of this story first appeared in CNN Business’ Before the Bell newsletter. Not a subscriber ? You can register here.
The Federal Reserve’s next meeting on Wednesday will be one for the history books. Either the Fed will raise rates by three-quarters of a point for the third consecutive time, to 3%, or it will raise them by an unprecedented percentage point to 3.25%.
But what happens after that is anyone’s guess.
Wall Street is divided on whether the Fed will maintain an aggressive rate hike in November or if inflationary pressures will subside enough to allow the central bank to slow the pace a bit.
Thus, experts’ forecasts for the Fed’s short-term key rate after the November meeting fluctuate between 3.5% and 4%. The outlook is even bleaker for December, with economists predicting rates could be as low as 3.75% or as high as 4.5%.
The big problem facing the Fed: the economy still seems to be running a little too hot for its liking. Inflation is undoubtedly a major issue, but the labor market is strong, consumers continue to spend at a healthy pace, and house prices remain high even as mortgage rates have risen sharply.
“This data will likely encourage the Fed to continue to overdrive but also increase the odds that sooner or later it will make a policy mistake by tightening financial conditions too much to fight inflation,” said Timothy Chubb, chief investment officer at Girard, in 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 many big rate hikes risk “throwing the economy into a mild recession,” Chubb said. But it doesn’t predict a major economic meltdown like the one in 2008. It will more likely be “the variety of the 2001 recession, the second least bad outcome of an unlikely soft landing.”
Even if the economy avoids a major downturn, there are growing fears that the stock market – which has already had a dismal 2022 – will suffer much longer.
Investors have no idea where rates could be by the middle of next year as forecasts for July 2023 range from a low of 3.25% to a high of 5% . Additionally, other central banks, primarily the European Central Bank, are also expected to accelerate the pace and magnitude of rate hikes. This will likely lead to even more volatility in the markets.
“The major central banks still have work to do on inflation, including the Fed and the ECB. Recession fears present a weaker backdrop for global risk assets, and the global outlook remains abnormally uncertain,” said Luigi Speranza, chief economist and global head of BNP Paribas Markets 360, in a report.
Speranza said a recession in Europe “is inevitable”. And while it may not be “deep,” Speranza thinks it will be “prolonged.” As for the United States, he said that “the macroeconomic outlook looks less negative than in Europe” but that “restrictive policy and below-trend growth are needed to bring inflation under control”.
This all serves to be a rude awakening for investors, who were hoping that Fed Chairman Jerome Powell might finally clip his inflation hawk wings and start flapping more like a monetary policy dove instead. .
But unless the pace of consumer price increases starts to slow much faster and dramatically over the next few months, the Fed won’t be able to slow the pace of rate hikes anytime soon. And forget expectations that the Fed might pause in 2023 and start signaling possible rate cuts.
The Fed, as Powell likes to say, depends on data. And so far, it looks like all the data is pointing to more upside and rates will stay higher for longer.
“This meeting is going to be very important in light of all the recent data,” said Roger Aliaga-Díaz, chief economist for the Americas and head of portfolio construction for Vanguard. “It’s too early to talk about a pivot.”
The Great Recession may have happened almost fifteen years ago, but lawmakers are still closely watching major US banks to ensure these companies remain financially sound — and also act responsibly.
The CEOs of seven of the largest U.S. lenders will appear before the House Financial Services Committee on Wednesday and again before the Senate Banking Committee on Thursday. The title of the Chamber hearing? “Holding Megabanks Accountable: Oversight of America’s Largest Consumer Banks.”
Jamie Dimon, CEO of JPMorgan Chase (JPM), Jane Fraser of Citi (C) and Brian Moynihan, head of Bank of America (BAC), will testify and be subject to questions from Congress. The CEOs of Wells Fargo (WFC), Truist (TFC), PNC (PNC) and US Bancorp (USB) will also be present.
Types of questions likely to be asked: Do banks, which have built up reserves in recent years, have a sufficient financial cushion to deal with the possibility of an increase in delinquencies and payment defaults if consumers are unable to make mortgage and credit card payments on time? What are the big banks doing to combat 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 likely to grill bank CEOs on other issues as well, including fees, predatory lending and broader concerns about the economy and the housing market.
Monday: UK stock exchange closed for funeral of Queen Elizabeth II; AutoZone (AZO) revenue
Tuesday: Housing starts and building permits in the United States; income from Stitch Fix (SFIX)
Wednesday: Fed interest rate decision; sales of existing homes in the United States; revenues from General Mills (GIS), Lennar (LEN), KB Home (KBH) and Trip.com (TCOM)
Thursday: Bank of England interest rate decision; weekly jobless claims in the United States; revenues from Accenture (ACN), Darden Restaurants (DRI), Manchester United (MANU), Costco (COST) and FedEx (FDX)
Friday: UK emergency budget for the energy crisis
. Stocks week coming One another big rise rate is coming Foam Rinse Repeat