A broad sell-off sent U.S. stocks reeling on Tuesday after a hotter-than-expected inflation report dashed hopes that the Federal Reserve could relent and scale back its policy tightening in the coming months.
This is the last inflation report before the Fed’s policy meeting next week. Investors had hoped the Fed would have some reason to raise rates less dramatically. But the Fed is determined to quash inflation despite the risk of pushing the economy into a recession. And Tuesday’s report dampens hopes that inflation has already peaked.
Financial markets have fully priced in an interest rate hike of at least 75 basis points at the conclusion of the FOMC’s policy meeting next week, with a 33% probability of a super-sized, full-percentage-point increase to the Fed funds target rate. The central bank’s target range is currently 2.25 per cent to 2.50 per cent.
In a note following the August CPI data, Goldman Sachs sees a more aggressive Federal Reserve. “We have raised our forecast for the Fed’s December meeting to a 50bp rate hike (vs. 25bp previously). We now expect a 75bp hike in September followed by 50bp hikes in November and December, which would take the funds rate to 4-4.25 per cent by the end of the year.”
With hopes of a “Fed pivot” firmly dashed, all three major U.S. stock indexes veered sharply lower, snapping four-day winning streaks and notching their biggest one-day percentage drops since June 2020 during the throes of the COVID-19 pandemic.
The VIX rose more than 14% to 27.27.
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