The SPDR S&P 500 ETF Trust SPY rebounded a bit from its early week downturn on Wednesday morning ahead of a critical Federal Open Market Committee interest rate decision at 2 p.m. ET.
Market Expectations: The bond market is pricing in 97.8% chance of a 0.75% hike and a 2.2% chance of a 1% hike, according to CME Group.
Just a week ago, the market was pricing in a 91.8% chance of only a 0.5% rate hike.
As of Tuesday, most major investment banks were projecting a 0.75% rate hike, which would be the largest in 28 years:
- Barclays +75bps
- Deutsche Bank +75bps
- CapEcon +75bps
- Goldman +75bps
- JPMorgan +75bps
- Jefferies +75bps
- Nomura +75bps
- SocGen +75bps
- TD +75bps
- Wells Fargo +75bps
- BNP +50bps
- BofA +50bps
- Citi +50bps
- Credit Suisse +50bps
- HSBC +50bps
- Morgan Stanley +50bps
- StanChart +50bps
The Federal Reserve will also be updating its longer-term interest rate outlook and economic projections. Investors will be paying particularly close attention to the Fed's interest rate dot plot projections and outlook for inflation.
In March, the Fed projected 2022 PCE inflation of 4.3% and 2022 GDP growth of 2.2%.
Expectations for interest rates have jumped since the Labor Department reported on Friday that the consumer price index climbed 8.6% last month, the highest inflation reading since 1981.
Powell's Commentary: In addition to the interest rate decision and the updated projections, investors will be listening closely to Fed Chair Jerome Powell's commentary on the economic outlook at his press conference starting at 2:30 p.m. ET.
DataTrek Research co-founder Nicholas Colas said Tuesday that Powell must walk a fine line in discussing the economy.
"He will need to sound optimistic or risk amplifying concerns about a recession. But … markets would take too much optimism as a sign that interest rates must go higher than already forecast," Colas said.
Quincy Krosby, chief equity strategist for LPL Financial, said Wednesday that analysts and economists remain divided on whether the Fed can get inflation under control without tipping the economy into a recession.
"The key for markets is to forecast where earnings are headed as it's clear that the Fed is resolute in fighting inflation that is broadening and becoming more entrenched. A tougher approach will no doubt weaken demand as markets wait — and hope — that supply chain headwinds begin to ease and offer another quiver to fight higher prices," Krosby said.
Benzinga's Take: Up until a few days ago, the Fed had consistently set market expectations for a 0.5% June rate hike.
At this point, the market seems convinced a 0.75% rate hike is coming, but any surprises in the interest rate decision or the Fed's economic projections could trigger some major volatility on an already jittery Wall Street.
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