Investors fear Fed will tighten rates too far as inflation bites
Just months ago, investors worried the Federal Reserve was not fighting inflation aggressively enough.
Just months ago, investors worried the Federal Reserve was not fighting inflation aggressively enough. Several jumbo rate hikes later, some now fear the Fed will plunge the economy into recession by tightening monetary policy too quickly.
With markets reeling from last week’s robust inflation number, interest rate futures late Friday were pricing in a roughly 20% chance that the Fed will raise rates by 100 basis points at its Sept 21 meeting. That number was all but unthinkable earlier this month, when the market was debating whether the move would be 50 or 75 basis points. Investors are also pricing in meatier rate hikes down the road, with the terminal rate for U.S. fed funds now at 4.4%.
While earlier in the year some investors had criticized the Fed for moving too slowly, many are now more worried the frenetic pace of rate increases may not allow policymakers to gauge the effects of monetary tightening on the economy, increasing risks that they raise rates too far.
“We’re all scared of over-tightening and the hard landing scenario, because the Fed has over-tightened and caused hard landings more often than they have not,” said Jeffrey Sherman, deputy chief investment officer at bond fund DoubleLine.
U.S. data has shown an economy that appears to be humming along, despite 225 basis points in tightening already delivered by the Fed. Yet worrying signals are easy to find, from a dire earnings shortfall from delivery firm FedEx that the company blamed on slowing growth to a warning from the World Bank that even a “moderate hit” could send the global economy into a recession.