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Investors are nervous as the Federal Reserve prepares to make its policy decision next week. Some even begin to prepare for a big surprise.
What’s going on ? Tuesday’s new inflation data showed prices were not falling as quickly as Wall Street had hoped. Markets slumped as the report fueled fears that the central bank and Chairman Jerome Powell may decide to raise rates more aggressively, inflicting severe economic hardship.
Tuesday’s alarming inflation report was the last before Federal Reserve officials meet for their next interest rate decision, and it signaled to markets that the Fed won’t let go of the accelerator in its struggle to moderate price increases anytime soon.
Investors put the odds of a three-quarters percentage point hike next week at 75%, according to data from CME FedWatch. But some financial bigwigs have started discussing a scenario in which the Fed raises rates by one percentage point for the first time in modern history.
The odds of a full point rise hover around 25% following the inflation report, up from 0% a week ago. Economists at brokerage Nomura Securities changed their forecast from 75 basis points to 100 basis points.
Larry Summers, the former treasury secretary and president emeritus of Harvard, wrote on Twitter that he doesn’t think gradual increases in interest rates have helped dampen high prices. The Fed has already hiked rates four times this year and inflation remains near 40-year highs.
Markets could even surprise on the upside if they are reassured that the Fed is taking inflation seriously, Summers said. It is best to take a ‘tear the bandage’ approach. He added, “I would go for a 100 basis point move to build credibility.”
But markets often don’t like interest rate hikes, which can negatively impact earnings and stock prices.
A one-percentage-point hike would also push the federal funds rate into what the Fed considers a restrictive range — where it says economic growth tends to slow and unemployment rates tend to rise. This limits the Fed’s chances of executing a soft landing, the Goldilocks situation where the Fed cools the economy enough to reduce inflation but not enough to cause a recession.
Still, some economists think shocking the markets is a good thing, and at least one Fed official agrees.
Minneapolis Fed Chairman Neel Kashari said last month he was glad markets fell after Powell warned of the pain ahead. It meant people understood the seriousness of the Fed’s commitment to bringing inflation rates down 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 figuring this out.”
Higher bond yields, lower stock prices and widening credit spreads that make borrowing more expensive for companies with weaker balance sheets are needed 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 analysts on Wall Street is still for a 75 basis point hike, and Powell likes to communicate and prepare the markets for any changes.
But that doesn’t mean a bigger upside won’t happen at the November meeting.
“I wouldn’t rule out a 100 basis point rate hike,” Marvin Loh, senior strategist at State Street, told me. “Just a few months ago, a 50 basis point hike seemed unthinkable.”
Unions and management reached a tentative deal early Thursday that averts a freight railroad strike that threatened to cripple U.S. supply chains and drive up prices for many commodities.
The deal with unions representing more than 50,000 engineers and conductors was announced just after 5 a.m. ET in a statement from the White House, which called it “an important victory for our economy and the people American”.
It came after 20 hours of talks between union leadership and railroad union negotiators organized by Labor Secretary Marty Walsh. They began their meeting Wednesday morning with the countdown to a strike scheduled to begin at 12:01 a.m. ET Friday.
Watch this space: the deal doesn’t mean the threat of a strike has completely disappeared. The agreement must be ratified by union members.
But it’s good news for a wide range of businesses that depend on freight railroads to continue operating, and for the entire US economy. About 30% of the country’s freight is transported by rail.
Few details of the agreement have so far been made public. But President Joe Biden’s statement said the major issue that had brought the country one day away from its first nationwide railroad strike in 30 years had been resolved in favor of unions.
“This is a victory for tens of thousands of railroad workers who have worked tirelessly during the pandemic to ensure American families and communities receive deliveries of what has kept us going through these difficult years,” says Biden’s statement. “These railroad workers will enjoy better pay, better working conditions and peace of mind about their health costs: all hard-earned.”
Ethereum, the world’s second most valuable cryptocurrency, has completed a massive software upgrade that its backers say will reduce its carbon footprint.
The latest: The long-awaited overhaul, known as “The Merge”, will reduce Ethereum’s energy consumption by almost 99.95%, according to the Ethereum Foundation, a non-profit organization dedicated to support for cryptocurrency and its associated technologies.
Until now, Ethereum and Bitcoin operated on a mechanism called “proof of work”, whereby powerful computers were needed to solve complex puzzles. The merger moves Ethereum to a mechanism called “proof-of-stake,” which is much more energy-efficient, reports my CNN Business colleague Diksha Madhok.
“Happy merging everyone,” Vitalik Buterin, the 28-year-old Russian-Canadian programmer who helped create Ethereum, tweeted. “This is a great moment for the Ethereum ecosystem. Everyone who helped make the merger happen should be very proud today.”
The co-founder said the upgrade “will reduce global electricity consumption by 0.2%.”
While cryptocurrencies have seen a phenomenal 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 Insight: Ethereum is down over 1% in the past 24 hours. But analysts believe it could boost long-term adoption, especially for investors trying to align their portfolios with broader environmental goals.
Adobe (ADBE) releases earnings after the bell.
Also today: US retail sales for August arrive at 8:30 a.m. ET. Industrial production data follows at 9:15 a.m. ET.
Coming tomorrow: A first look at the University of Michigan consumer sentiment survey for September.