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Following the recent US CPI report which indicated that inflation in America has reached a 40-year high, many expect the Federal Reserve to raise its benchmark interest rate by 75 to 100 basis points (bps) on July 26. Blackstone’s Private Wealth Solutions expects the Fed to raise interest rates by 75 bps and bankrate.com believes a three-quarter interest rate hike is also on the cards.
Next week, about six days from now, the US Federal Reserve will meet again to review and change the federal funds rate. The Federal Reserve has been raising interest rates since mid-March 2022. At that time in March, the central bank raised its benchmark interest rate from near zero to 0.25% for the first time since 2018. After the Fed did so, U.S. inflation continued to rise and JPMorgan economists predicted that the central bank would raise interest rates by 75 bps in June.
The rate hike forecast came true when the US Federal Reserve raised the federal funds rate by 75 bps on June 15, 2022. America had not seen a 75 bps jump since 1994 when Alan Greenspan served as the 13th chairman of the Federal Reserve. At that time, the country was administered by the Democratic President Bill Clinton and inflation was quite low at 2.7%. However, many observers at the time said that Greenspan was often hawkish and the market indices were becoming volatile.
Before Greenspan’s infamous 75 bps rate hike, tech giant Cisco Systems saw a 16% decline in value and fell 54% through October 1994. Shares stemming from Applied Materials corrected 30%, and EMC saw a similar decline. Goldman Sachs investment strategist Abby Cohen noted that close to 40% of all active stocks were down more than 30% from peaks reached in 1994. Greenspan began tightening monetary policy, and Standard & Poor’s investment strategist Arnold Kaufman said at the time that the the US economy would pick up again in 1995.
“We don’t see this as a bear market,” Kaufman explained that year. “The difference is that we buy the ‘soft landing’ concept [for the economy]while others are not.”
Kaufman was right, as the U.S. economy picked up and market indexes were less volatile, starting to rise steadily in 1995. More than 27 years later, the 16th chairman of the Federal Reserve, Jerome Powell, appears to have been in a hawkish mode page. the first rate hike in March. While inflation continues to hit all-time highs, Powell believes current price pressures will dissipate quickly, and the central bank’s chairman believes the Fed can tame red-hot inflation.
Currently, investment strategist in Blackstone’s Private Wealth Solutions group, Joseph Zidle, believes a 75bps rate hike will happen next week. “My own view is that the Fed Funds rate could go above 4%. I think they could go above 4.5%, maybe even closer to 5%,” Zidle told Bloomberg in an interview. In addition to Blackstone’s guess, Bank Rate predicts .com also up 75 bps ahead of next Fed meeting Bankrate.com says U.S. central bank policymakers “show no signs of stopping.” Financial bank comparison website added:
New forecasts also released with the June decision project a 3.25-3.5 percent federal funds rate by the end of 2022, the highest since 2008.
Meanwhile, there are many higher predictions as well, as some believe a 100 bps increase could very well happen. “With inflation so high, the Fed’s next rate hike could be the biggest in decades,” a report published by Barron’s notes and details the next rate hike could be 1%. Furthermore, other sources originating from the likes of CBS and CNBC indicate that a 100 bps hike will be announced next Wednesday at the Federal Open Market Committee’s (FOMC) monthly meeting.
What do you think the Fed will do during the next FOMC meeting? Do you expect a 75 bps or 100 bps hike next week? Let us know your thoughts on this topic in the comments section below.
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