Stocks plummeted this afternoon as investors digested the odds of an accelerated rate hike schedule. Yesterday, the market learned that inflation rose faster than expected in January. Last month’s Consumer Price Index (CPI) rose 7.5% year-over-year, beating the consensus estimate of +7.2% with ease.
Bulls were able to handle the “red hot” inflation reading until the afternoon when St. Louis Fed President Jim Bullard said that the Fed would raise rates by 100 basis points by July 1st. This was a far more hawkish outlook than the Treasury markets expected, and commodity trading advisors quickly priced this in.
“[A 100 bps hike] not out of the realm of possibility,” said David Spika, GuideStone Capital Management president.
“The Fed realizes they have to start moving. […] Consumers are getting killed with this inflation. The Fed has to move and has to move quickly if they want to rein this in.”
He continued adding:
“If you go back even to the end of the financial crisis, monetary policy has been the key factor in driving returns and really providing that ‘Fed put’ that really allowed investors to come in and buy the dip. Those days are behind us —particularly with the inflation we’re seeing now — and the market does not like this. It’s like a kid that has never been told ‘no,’ that is now being told no and is throwing a temper tantrum. This will continue.”
Yields surged as a result and continued to climb this morning. The 10-year Treasury yield is now above 2.00% for the first time since mid-2019. Stocks plunged in response to yesterday’s yield shock. Today, the major indexes quickly fell again.
“Markets are a tiny bit more relaxed than Thurs, but investors are still on edge. Cold water is being poured on the off-meeting and 50bp 3/16 hike chatter from [Thursday] […] but equities are still becoming acclimated to an environment where stimulus withdrawal is going to be the defining theme for a long time,” wrote Vital Knowledge’s Adam Crisafulli in a note to clients.
Now, Wall Street expects a 50 basis point rate hike in the Fed’s March meeting. And within the last few hours, the Fed called for an unscheduled “expedited, closed” meeting on Monday at 11:30 am EST.
The Fed claims the goal of the Monday meeting is to “review and [determine] […] the advance and discount rates to be charged by the Federal Reserve Banks.”
The last time the Fed held a meeting like this was back in late November 2015. The stated goal at the time was exactly the same as this Monday’s meeting, word for word.
Rates were then raised for the first time since 2006 a few weeks later. Then, in late 2016, the Fed began to slowly bring the federal funds rate higher on a more regular schedule until late 2018, when it hit 2.50% and all hell broke loose. The market crashed and Fed Chairman Jerome Powell lowered rates soon after.
This time around, though, inflation is at a 40-year high and Powell needs to act fast if he’s going to bring it meaningfully lower by year’s end. With the Fed set to raise rates in March, a similar situation may play out regardless.
