The yield on the two-year Treasury note, which is sensitive to changes in Fed policy, rose to 3.95 percent on Monday, hitting its highest point since 2007 and continuing a remarkable streak since early year when it was below 0.75 percent. Rising yields flow into mortgages, credit cards, business loans and other borrowing costs, affecting economic activity.
Most investors still expect the Fed to hold a 0.75 percentage point hike on Wednesday based on futures prices, signaling investors’ expectations for rate hikes. However, a small number of investors are betting on a full point rise, which would be the Fed’s biggest since 1984 and would likely send stocks tumbling.
Last week, analysts at Nomura predicted the Fed would raise rates by one percentage point, saying stubbornly high inflation numbers require a more “forceful” response from policymakers.
Other central banks have taken similar steps or are considering them. The Bank of Canada raised interest rates by one percentage point in July. Some bankers expect the Riksbank, the Swedish central bank, could raise rates by a percentage point on Tuesday.
And while most investors are still expecting a three-quarter point boost from the Fed on Wednesday, the futures market shows that investors have quickly adjusted to the idea that more interest rate hikes are coming, expecting a peak between 4.25 percent and 4.5 percent next. year, before falling towards the end of the year.
For a more detailed read, and not of Powell’s comments, investors will also be looking for changes to the Fed’s “dot plot,” the name given to the collection of dots created when plotting interest rate forecasts. interest of individual politicians on a graph. In particular, they will look for signs that the Fed is willing to keep interest rates high to tackle inflation, even as they forecast a slowdown in economic growth, raising the risk of the economy slipping into recession.
“That’s the ugly scenario,” said Guy LeBas, chief fixed income strategist at Janney Capital Management. “That’s the signal, in theory, that the Fed is prioritizing inflation over economic growth and will for a while.”