Investors debate US Fed’s next move

The Federal Reserve will hike rates next week, but by how much? Until recently, a quarter-point hike was viewed as almost certain. However, hawkish language from Fed chief Jerome Powell spooked investors last week, with Powell bluntly saying he was “prepared to increase the pace of rate hikes”.

Markets promptly priced in 80 per cent odds of a half-point hike. The Fed’s downshifting to a quarter-point hike in January now looks mistaken, says DataTrek Research. A half-point hike would be the first time since 1990 the Fed has “stutter-stepped” at the end of a rate-hiking cycle.

Like many other strategists, Datatrek is cautious, saying stocks look expensive against an uncertain economic backdrop. Certainly, keeping rates higher for longer – Blackrock warns rates may hit 6 per cent – increases the odds of an eventual hard landing as well as making bonds and cash more attractive relative to stocks.

Warnings over the trajectory of rates aren’t new, of course, but the sudden collapse of Silicon Valley lender SVN Financial means investors have become less willing to shrug off bearish concerns. Last week was the worst for the S&P 500 since September. For banks, it was the worst week in almost three years.