The central bank hawks will never die?
The surprise rate hike from the Bank of England is a reminder that inflation is still not totally under control yet. Your move, Jerome Powell.
So much for inflation fading into the rearview mirror for the global economy and financial markets? The Bank of England stunned the investing world Thursday by announcing a surprise half-point rate hike, citing “persistent inflationary pressures.”
UK stocks tumbled on the news while the major American market indexes were mixed. Still, the Dow, S&P 500 and Nasdaq have all pulled back a bit in the past week.
Wall Street may need to get used to the notion that the Federal Reserve, along with the BOE and other major central banks, is likely to remain more hawkish for the foreseeable future.
The Fed still seems more nervous about inflation than the possibility that the rate hikes of the past year are going to lead to a big spike in unemployment and a possible recession.
To that end, Fed chair Jerome Powell told Congress yesterday in his semiannual testimony that “getting inflation back down to 2 percent has a long way to go.” That doesn’t sound dovish at all.
The Fed, of course, will remain data dependent. And there are several more important reports that will give the Fed a better sense of what’s happening with consumer prices and the labor market due to be released before the Fed’s next policy decision on July 26.
But make no mistake. The market is now once again bracing for more rate hikes. The Fed’s decision to not raise rates last week, keeping them steady at 5%, may turn out to be a pause, and not an end to the current rate hiking campaign.
Traders are now pricing in a 77% probability of a quarter-point hike at the July meeting, according to the CME FedWatch Tool. That is up from odds of just 33% for a rate increase to 5.25% a month ago.
Stocks have had a solid 2023 so far, but investors may still be pinning too many hopes on a bet that the Fed will hold rates steady and perhaps even begin cutting by year’s end. That may turn out to be a losing proposition.