Tuesday’s unexpectedly hot inflation reading virtually assured markets that the Federal Reserve will raise rates by 75 basis points next week. Wall Street then began to weigh the chance that the Fed might make a more dramatic statement.
The odds for a 100 basis point rate hike jumped more than 20% after the consumer price index showed an increase from July. With hopes of a “Fed pivot” firmly dashed, the S&P 500 Index tumbled as much as 3.2%.
Most investment professionals doubted that an unexpectedly high inflation reading would push the central bank off course to raise rates at their September meeting by an amount not seen since 1984.
“The Fed will want to follow what the market expects and the market is really expecting a 75 basis points move -– so that’s what the Fed will do,” said Tom Di Galoma, managing director at Seaport Global.
But on Tuesday, Nomura economists changed their forecast for the Fed’s September meeting from a 75 to 100 basis points, writing that “a more aggressive path of interest rate hikes will be needed to combat increasingly entrenched inflation.”
Larry Summers, former Treasury Secretary and the President Emeritus of Harvard University, tweeted that if he was a Fed official, he would pick “a 100 basis points move to reinforce credibility.”
And Scott Buchta, head of fixed-income strategy at Brean Capital, said that if the Fed needs to raise rates sharply, it would be best to do so quickly and get it over with.
“Seventy-five is most likely, but they should do 100,” he said.
\Here’s what other Wall Street strategists said:
Steve Sosnick, chief strategist at Interactive Brokers: