Market braces for another three-quarter point hike from the Fed this month

Traders now see near certainty that the Federal Reserve will enact its third straight 0.75 percentage point interest rate hike at its meeting later this month.

The probability of a three-quarter point hike rose to 82% on Wednesday morning, according to the CME Group FedWatch Tracking betting on federal funds futures.

This follows a series of positive economic data and statements by Fed officials indicating that a restrictive policy is likely to persist well into the future. In a landmark speech on August 26, Fed Chairman Jerome Powell warned that increases will continue and higher rates will likely stay in place

Even as traders increased their bets on Fed tightening, the shares were higher shortly after the market opened. A Wall Street Journal report noting that the likelihood of a 0.75 percentage point increase coincided with traders’ prices in the more aggressive move, and stock futures momentarily slipped.

“In June 75 [basis point] the Federal Reserve’s rate hike was seen as a surprising acceleration from the 50bp and 25bp delivered at the previous two meetings. Less than three months later, 75 bp has become something of a global standard with both the [European Central Bank] and the Bank of Canada is set to raise rates by 75 basis points,” Citigroup economist Andrew Hollenhorst said in a client note on Wednesday.

“These ‘rapid’ rate hikes follow a similar logic – in economies where inflation is well above target, there is little argument against at least returning policy rates and financial conditions to a framework ‘neutral’ if not in restrictive territory,” he added.

Indeed, Powell, in his speech at the Fed’s annual retreat in Jackson Hole, Wyoming, said the central bank will have to go beyond the neutral rate, which is considered neither conducive nor restrictive to growth. He said a restrictive policy is needed to stifle inflation which is hovering near its highest rate in more than 40 years.

“We are deliberately moving our policy to a level that will be restrictive enough to bring inflation down to 2%,” he said. Looking ahead, Powell added that “restoring price stability is likely to require tight policy to continue for some time. The track record strongly cautions against premature policy easing.”

The Fed has raised interest rates four times this year for a total of 2.25 percentage points. Those hikes included two moves of 0.75 percentage points in June and July, the most aggressive since the Fed began using its key rate as its main policy tool in the early 1990s.

Markets were set for a heavy dose of Fed speech on Wednesday, culminating in remarks from Fed Governor Lael Brainard at 12:40 p.m. ET. Fed Governor Michael Barr will make his first public comments since being confirmed as Vice Chairman for Supervision, the Fed’s powerful banking supervisor.

Another speaker, Cleveland Fed President Loretta Mester, repeated her assertion that the federal funds rate, currently pegged in a range of 2.25% to 2.5%, is expected to top 4% in here next year and stay high until inflation comes down.

“In my view, it is far too early to conclude that inflation has peaked, let alone that it is on a sustainable downward path to 2%,” Mester said.

Powell will speak Thursday in a Q&A session with the Cato Institute.

Fed officials will be watching the remaining large data points closely ahead of the September 20-21 Federal Open Market Committee meeting. The most important of these will be the consumer price index read next week, as well as the producer price index.

However, Hollenhorst thinks these reports will have a greater influence on moves beyond September, with a three-quarter point rise very likely this month.

“Rather than the magnitude of the upside in September, markets may start to focus more on the next upside in November. Our base case is for a 50bps slowdown, but that will depend on the details of the next two reports. on CPI inflation as well as the jobs report for September (released in early October),” he wrote.