The Federal Reserve's "crazy" interest rate raising week starts, and it is predicted that interest rate reduction may not take until 2024

Investors are preparing for a more "crazy" rate hike. On Monday, the yield of 10-year US treasury bonds jumped to more than 3.5%, the highest level since 2011,Federal ReserveA two-day meeting will be held from September 20 to 21. It is widely expected that officials will raise the benchmark interest rate by 75 basis points for the third time in a row after discussion at 2:00 p.m. EDT on Wednesday. Goldman Sachs speculates that the Federal Reserve will not cut interest rates until 2024.

Traders will be recruited from the Federal Reserve ChairmanJerome Powell (Jerome Powell), the economic forecasts of members of the Central Bank of America and the latest dot matrix chart showing each official's forecast of the central bank's key short-term interest rates.

The interest rate increase signal has been released in advance

Federal Reserve officials have made consistent hawkish comments on the prospect of interest rate policy in the past few weeks. They said the Fed must reduce inflation until the target is reached.

According to the previous report of Bitweet, Powell delivered a speech on September 8, saying: "To a large extent, we and I are of the opinion that we need to take action directly and firmly, as we have been doing, and we need to persevere until the work is completed.".

Vice Chairman of the Federal ReserveLael BrainardVice Chairman of SupervisionMichael BarrBarr said frankly that higher interest rates may bring "some pain to the economy", but "what's worse... is to keep inflation high."

Key data and market reaction

The expected reading from the Federal Reserve may determine whether the market is relieved from the sell-off or continues to fall sharply.

Last Friday, all three US stock indexes recorded their worst week since June. In the week ended September 16, the benchmark S&P 500 index fell 4.7%, the Dow Jones Industrial Average fell 4.1%, and the tech heavy Nasdaq Composite fell 5.5%.

The US Bureau of Labor Statistics reported last Tuesday that the consumer price index (CPI) in August was 8.3% higher than the same period last year and 0.1% higher than last month. According to Bloomberg estimates, economists had expected prices to rise by 8.1% over last year and fall by 0.1% over last month.

image.png

This week, a series of housing related data in the United States will be released, and indicators such as building permits, housing starts and existing housing sales will be closely watched. The mortgage interest rate soared to more than 6% last week, the highest level since November 2008, which increased people's concern about loan affordability. According to Bankrate Com data, the cost of credit card borrowing has reached the highest level since 1996.

With the advent of the financial reporting season in October, many strategists also sounded an alarm about the earnings expectations of major listed companies.

According to the data of FactSet Research, the third quarter earnings growth of the S&P 500 index is expected to be 3.7%, which is far lower than the 9.8% growth forecast at the end of June.

In the past 2-3 months, analysts have lowered the third quarter earnings forecast of each sector of the S&P 500 index except energy. At present, it is estimated that the earnings of 7 of the 11 sectors of the index will decline directly year on year, compared with only 3 in the second quarter.

Recession warning

Powell and other Fed officials have repeatedly stressed that the goal of the Federal Reserve is to achieve a "soft landing", that is, they will slow economic growth to curb inflation, but will not trigger a recession.

However, after the government reported last week that the inflation rate in the past year had reached 8.3%, this target seems to be further out of reach. Worse, the so-called core prices (excluding volatile food and energy categories) rose much faster than expected.

The data triggered a new round of pessimism that the Federal Reserve's "violent interest rate hike" would lead to economic recession.

Wall Street heavyweights including Bank of America, Goldman Sachs and Nomura raised their interest rate expectations immediately after the CPI data was released, and raised their expectations for a hard landing of the economy, that is, a sharp decline after a period of rapid growth.

Goldman Sachs warned that if the Fed's interest rate hike triggered an economic recession, the stock market could plummet another 26%.

Goldman Sachs said: "If only a severe recession - and the Federal Reserve's more stringent response - can curb inflation, then the downward space for stocks and government bonds may still be large, even after the decline we have seen."

Michael Hartnett, chief investment strategist of Bank of America, said in a report on Friday that the impact of declining earnings per share may be the catalyst for a new low in the market.

Analysts of Bank of America led by Michael Gapen said: "In the updated forecast, we expect to revise in the direction of slower growth, higher unemployment rate and higher terminal interest rate - however, we expect the inflation path to remain basically unchanged, which, in our view, indicates that the risk of a hard landing is rising, although we expect nearly half of the members to predict a soft landing."

A research report released by the Brookings Institution earlier this month wrote that economic recession and mass layoffs will be necessary conditions to slow down the rise in prices. The unemployment rate may have to reach 7.5% to return inflation to the Federal Reserve's 2% target.

When is the interest rate hike?

Goldman Sachs speculates that the Federal Reserve will not cut interest rates until 2024.

The Goldman Sachs analysis team led by Jan Hatzius believes that from now to the end of 2023, the Federal Reserve will raise interest rates four more times, and then maintain interest rates in the range of 4.25% to 4.50% until 2024. Like many other companies, Goldman Sachs expects the Federal Reserve to raise interest rates by 75 basis points later this week.

Goldman Sachs also predicted that the Federal Reserve would raise interest rates by another 50 basis points in November and December, and then raise interest rates once in 2023 and cut interest rates once in 2024.Analysts wrote in the report: "We have seen several reasons for changing the plan. The stock market is trying to get rid of the pressure of the Federal Reserve's financial tightening policy. The strength of the labor market has reduced the concern about excessive tightening at this stage. Federal Reserve officials now seem to want to make faster and more consistent progress in reversing overheating. Some officials may have reassessed short-term neutral interest rates.".

David Rubenstein, co-founder of The Carlyle Group and private equity billionaire, said in a Fox News interview that if the Federal Reserve raised interest rates by 100 basis points, it would "shock" the market. He said: "If they reach 100 basis points, I think it will shock the market.

Loretta Mester, President of the Federal Reserve Bank of Cleveland, is one of the 12 officials who will vote on the decision of the Federal Reserve this week. She believes that it is necessary to raise the interest rate of the Federal Reserve to "slightly higher than 4% and keep it there" early next year. Mester added, "I don't expect to cut interest rates next year.".

Author: Mary Liu