For weeks, Federal Reserve Chairman Jerome Powell indicated that the Fed was likely to raise interest rates by 50 basis points in both June and July.
But after the June 10 news that consumer prices soared 8.6% in the 12 months through May, a 40-year high, investors and analysts began to ratchet their expectations upward. Barclays bank and investment bank Jefferies switched their predictions to 75 basis points from 50 for the meeting that ends June 15, Bloomberg reported.
As of late afternoon June 13, interest-rate futures traders saw a 69% chance of a 50 basis-point hike in June and a 31% chance of a 75-basis point hike.
But Steven Englander, global head of G-10 FX research at Standard Chartered Bank, took that a step further.
“The Fed’s trying to erase any perception that they’re behind the curve,” he said, according to Bloomberg.
“Fifty was the big round number six months ago. Meanwhile, 75 is a very middling type of hike. So the Fed might say: ‘Look, if we want to show commitment, let’s just do 100.’”
Only 10% Chance
To be sure, Englander sees only a 10% likelihood that the Fed will go 100 points. His baseline projection is still 50 basis points.
So what does all this speculation about large Fed rate hikes mean for you as an investor? It has sent both stocks and bonds reeling, arguably creating bargains in both markets.
The S&P 500 officially entered a bear market June 13, with the index recently standing at 3,766, down 21% from its Jan. 3 record closing high of 4,797.
Renowned Wharton finance professor Jeremy Siegel, who’s generally bullish, says now is a time to buy. “Hold in there,” he told CNBC. “If you got cash, begin to employ it. You won’t be sorry a year from now.”
The market always recovered from earlier drops, Siegel noted. “We’ve had bigger shocks in the past,” he said.
“There may be another 5%, who knows, there may be another 10%, but that .. just raises the return on the market looking forward.”
Buying Stocks and Bonds
You can purchase anything from broad stock-market index funds to individual stocks. You’ll probably want to stick with small amounts of whatever you choose, because stocks may go down further. By keeping some dry powder, you can buy more if the market does keep dropping.
In the last 19 bear markets, the average drop totaled 37% peak to trough, with an average duration of 289 days, or about 9.6 months, according to Bank of America.
As for bonds, the rise in yields makes them more attractive for investors who want to purchase individual bonds and hold them until maturity.
Treasuries, of course, are the safest bonds. You’ll receive par value when the bonds mature, unless the U.S. government defaults on its debt, which is extremely unlikely. The three-year Treasury recently yielded 3.47%.
You also might consider double-A corporate bonds, which are considered safer than other corporate bonds, except for triple-A bonds. A three-year Apple bond recently yielded 3.77%.
Again you’ll likely want to buy in small amounts, as bond yields may well rise further.
