The Fed is ready to raise interest rates by 75 basis points, but a policy shift may be too early

As the two-day policy meeting of the Federal Open Market Committee (FOMC) comes to an end, investors seem confident that the Federal Reserve is ready to continue raising interest rates. According to CME data, as of the afternoon of November 1, New York time, the CME futures market expected the probability of a 75 basis point rate hike to be 87.5%.

Just a month ago, the market expected the probability of a 50 basis point rate hike to be 43.5%, and the probability of a 75 basis point rate hike to be 56.5%.

Strong U.S. labor market

Investors are closely watching the Fed's statement and Fed Chairman Jerome Powell's press conference for signs of a slowdown in policy. The 75 basis point rate hike seems to be a "done deal," but people are more concerned about the future message conveyed by the meeting.

Previously, many market experts and analysts predicted that the Federal Reserve would send a dovish signal of "brake" in the next few meetings, such as slowing down the interest rate hike by 50 basis points starting in December.

But unexpectedly strong employment data released on Tuesday suggested the Fed may continue its aggressive policy moves.

According to data released by the Bureau of Labor Statistics, the total number of job vacancies in the United States in September was 10.72 million, far higher than the FactSet estimate of 9.85 million, and the total was about 500,000 higher than the level in August, indicating strong demand in the labor market. The largest increases in job vacancies were in accommodation and food services, health care, and transportation, warehousing and utilities.

Federal Reserve officials worry that labor shortages are causing wages to surge and fueling high inflation. A persistent imbalance between labor supply and demand continues to support strong wage growth, exacerbating broad price pressures and reinforcing expectations for another big interest rate hike on Wednesday.

Stock and crypto markets lower

U.S. stocks opened higher and closed lower on Tuesday, with the Dow Jones Industrial Average closing down 79.75 points at 32,653.20, the S&P 500 falling 0.41% to 3,856.10, and the Nasdaq Composite falling 0.89% to 10,890.85.

In the crypto markets, Bitcoin and Ethereum traded sideways, with Bitcoin stagnating after an 8% gain last week on reduced volume and prices closing above the psychologically important $20,000 mark.

Is it “too early” for policy shift?

Since it began raising interest rates in March, the Fed has faced a difficult balancing act: raise rates slowly and risk losing its ability to control inflation, or raise rates quickly and risk a recession.

Fed officials decisively chose the latter, insisting that a recession caused by high interest rates is more destructive than a recession caused by refusing to reduce inflation. Fed Chairman Powell said after the September interest rate meeting: "We believe that failure to restore price stability will mean much greater pain later."

“If inflation surprises to the upside and the [Fed] is forced to back off, committing to a premature moderation without seeing meaningful progress on inflation could create another challenge to the Fed’s credibility,” economists at investment bank Nomura wrote in a research note this week.

“We believe the Fed will need clear and convincing evidence that inflation is indeed progressing before committing to slowing the pace of rate hikes,” they added.

Market bets on another big rate hike in December are split.

According to the Wall Street Journal, analysts at Deutsche Bank, UBS, Credit Suisse and Nomura Securities expect the Fed to continue to maintain its pace of 75 basis points and raise interest rates by the same amount in December.

Meanwhile, analysts at Bank of America, Goldman Sachs, Morgan Stanley and Evercore ISI believe the pace of rate hikes will slow in December, with a 50 basis point increase expected.