US Fed was expected to deliver either a 50 bps or a 75 bps rate hike in the September 20-21 meeting. But, now the reasons for the Fed to be more aggressive in hiking rates have emerged. Several economists and market participants are expecting the rate hike to be either 75 bps or 100 bps. If Fed goes for a full percentage rate hike, it will be the biggest rate hike in 40 years. “It’s certain that the US Fed will hike interest rates, but the debate is how much. We sense that the Fed will increase it by 75bps even though there is a low possibility that the hike could be as high as 100 bps,” says Sunil Damania, Chief Investment Officer, MarketsMojo.
Fed’s chief Powell is hiking rates with a clear objective which is to bring down inflation. From the current levels of around 8%, the Fed’s target of 2% is still at a distance.
Most people anticipate that the Fed will increase interest rates by an additional 75 basis points this week as part of its effort to reduce demand across the economy and stifle inflation. The core inflation is still high and a rebound in price rise cannot be ruled out either. Former Treasury Secretary and Harvard University President Emeritus Larry Summers has recently said that he does not believe that inflation can be controlled without interest rates reaching close to 4%. He continues by saying that if he had to choose between a 50 bps rise and a 100 bps move at the September FOMC meeting, he would select the latter “to enhance credibility.”
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A 75 bps point rate hike will confirm that the Fed is on its tightening path as per the earlier message sent out to the market. But, if a 100 bps point rate hike comes through, it might surprise the market on the downside and the next leg of selling could be seen. A full percentage point increase in interest rate also means Fed has turned more aggressive to weaken demand in the economy so as to tame inflation more aggressively.
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75 basis points or 100 basis points, the Federal Reserve’s aggressive tightening measure to combat inflation may lead to a recession, which is reflected in the market’s weakness. Two days before the US Fed’s crucial meeting, the S&P 500 and Nasdaq Composite closed the day’s session 0.69% and 0.76% higher than the previous day’s closing. The next few weeks could turn out to be more volatile and now the focus will shift to the quarterly results of key S&P 500 and Nasdaq listed companies that start flowing in from Mid-October.