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Market Would Shock And Depress If Fed Rate Hike Of 100 Basis Points

The Federal Reserve FED is unlikely to attack hot inflation with a massive rate hike of 100 basis points at this week’s policy meeting, as a hike that big would catch investors off guard and spark further worry about elevated consumer prices, Carlyle Group co-founder David Rubenstein told .

“The Fed rate hike has been telegraphing 75 basis points. If they were to go to 100 basis points, I think it would be shocking to the market,” Rubenstein said in a televised interview on Monday.

“I know some percentage of people in the market, 14% or so, think it might be 100 basis points, but I think they wouldn’t want to shock the market that way. So if they were going to do 100 basis points, I think they would have telegraphed it by now,” said Rubenstein, whose latest book “How to Invest: Masters on the Craft,” was released last week.

The Fed will begin meeting on Tuesday with a policy decision due Wednesday. It has raised the fed funds rate four times in 2022 to a range of 2.25% to 2.5%, including two consecutive increases at three-quarters of a percentage point.

“The Fed is likely to think if they were to do 100 basis points, the reaction would be that they know that inflation is much worse than people think it is. And therefore, I think it would probably depress the markets even more than they were depressed last week,” he said.

US stocks last week suffered their worst week since June after inflation in August cooled by less than anticipated. The Nasdaq Composite dropped roughly 5.5% and the S&P 500 fell by 4.1%.  The headline inflation rate of 8.3% missed expectations of 8.1%. Consumer price inflation has been lingering near a four-decade high.

US stocks dropped into a bear market this year on expectations the Fed would be aggressive in jacking up interest rates to bring down high inflation through slowing economic activity. The Nasdaq Composite, home to large-cap technology stocks, has plunged 26% this year. The S&P 500 has declined 18%. Both indexes were off their lows of the year.

The Treasury market has also sunk into a bear market this year, with yields soaring while bond prices decline. The Fed-policy sensitive 2-year Treasury note yield on Tuesday reached 3.97%, a fresh 15-year high. The 10-year Treasury yield rose to 3.56%, a fresh 11-year high. The yield curve inversion is widely considered a warning of economic recession.

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