This Tuesday, the stock markets in the United States registered their worst day in the last three months.
The Dow Jones index fell 3.9% while the S&P 500 and the Nasdaq fell 4.3 and 5.9 percent. Yesterday, September 14, Wednesday, these indexes closed again with small decreases.
Tuesday’s debacle was triggered by a negative surprise in US August inflation data released that morning. Although headline inflation in annual terms fell from 8.5% in July to 8.3% in August, the market was expecting a figure of 8.1 percent.
The fact that headline inflation is not falling as fast as expected, coupled with an increase in core inflation – which went from 5.9% in July to 6.3% in August – ended the illusion that the Fed was contemplating a less favorable trajectory. aggressive in its current bullish cycle.
Until before the publication of the inflation data, the futures market was assigning a probability of 23% to a rise of half a point and a probability of 77% for a rise of three quarters of a point in the announcement of the monetary policy decision. of the Fed scheduled for September 21.
After the negative inflation surprise, the futures market totally ruled out a half point rise, assigning a 76% probability to a three quarter point increase and a 24% probability to a one point rise.
Although a reaction of this magnitude on the part of the markets seems excessive, the reality is that investors had shown some complacency to build the expectation that inflation would come down quickly, hand in hand with gasoline prices, and that the Fed would slow down its rate of rise.
Gasoline prices are down 26% from their June peak, yet prices for other goods and services have fallen much less than expected. Likewise, producer prices, published yesterday Wednesday, registered an increase of 11% in the last 12 months.
This situation suggests that what began as a punctual increase in prices, in products and services affected by disruptions in supply chains and by the shock in the prices of raw materials, has permeated other goods and services.
If market expectations are met, the Fed will make its third consecutive increase of three-quarters of a point on September 21, leaving the reference interest rate in a range of 3.0 to 3.25 percent.
Additionally, barring a major positive surprise in inflation developments, the Fed will most likely raise the rate by at least half a point at its November meeting and by at least a quarter point in December. This would imply that the funding rate could close the year in a range of 3.75 to 4.0 percent.
The four percentage point increase in the funding rate in a single year is almost unprecedented since the 1970s.
The last increase of this magnitude occurred in a period of 18 months between June 2004 and December 2005 when the rate went from 1.25 to 4.25 percent. On that occasion, the rate continued to rise until reaching 5.25% in June 2006.
The rate remained there until September 2007, 12 months before the bankruptcy of Lehman Brothers and the bursting of the financial bubble that triggered the Great Recession of 2008-09.
As we have said before, the Fed seems willing to continue its hike cycle as long as necessary, even if this generates greater weakness in economic activity, in order to combat the deterioration in inflation expectations.
joaquinld@eleconomista.mx
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