Justin Wolfer Jerome Powell split
'Both a warning and a threat': Economics professor decodes Fed chair's comments
01:52 - Source: CNN

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New York CNN Business  — 

Investors are on edge as the Federal Reserve gears up for its policy decision next week. Some are even starting to brace for a big surprise.

What’s happening: New inflation data on Tuesday showed that prices aren’t easing as quickly as Wall Street had hoped. Markets plummeted as the report stoked fears that the central bank and Chair Jerome Powell would decide to hike rates more aggressively, inflicting serious economic pain.

Tuesday’s alarming inflation report was the last before Federal Reserve officials convene for their next decision on interest rates, and it signaled to markets that the Fed won’t pull its feet off the accelerator in its fight to moderate price increases anytime soon.

Investors are putting the odds of a three-quarter percentage point hike next week at 75%, according to CME FedWatch data. But some finance bigwigs have started discussing a scenario in which the Fed raises rates by a full percentage point for the first time in its modern history.

The odds for a full point hike are hovering around 25% in the wake of the inflation report, up from 0% one week ago. Economists at the brokerage Nomura Securities changed their forecast from 75 basis points to 100 basis points.

Larry Summers, the former Treasury Secretary and President Emeritus at Harvard, wrote on Twitter that he doesn’t think gradual increases in interest rates have been working to tamp down high prices. The Fed has hiked rates four times already this year, and inflation remains near 40-year highs.

Markets might even surprise to the upside if they are reassured that the Fed is taking inflation seriously, said Summers. It’s better to take a “rip off the bandaid” approach. He added, “I would choose a 100 basis points move to reinforce credibility.”

But markets don’t often take kindly to interest rate hikes, which can negatively impact earnings and stock prices.

A percentage point hike would also push the federal funds rate into what the Fed considers a restrictive range — where it says economic growth tends to slow and unemployment rates tend to rise. That limits the Fed’s chances of executing a soft landing, the Goldilocks situation where the Fed cools the economy enough to lower inflation but not enough to cause a recession.

Still, some economists think shocking markets is a good thing, and at least one Fed official agrees.

Minneapolis Fed president Neel Kashari said last month that he was happy markets tanked after Powell warned of pain ahead. It meant that people understood the seriousness of the Fed’s commitment to getting inflation rates back down to 2%, he said.

The Fed wants “a weaker stock market. They want higher bond yields,” former New York Federal Reserve President Bill Dudley told my colleague Matt Egan last month. “The stock market I think is finally catching onto that.”

Higher bond yields, lower stock prices and widening credit spreads that make it more expensive for companies with weaker balance sheets to borrow are necessary to tighten financial conditions.

The bottom line: It’s unlikely that the Federal Reserve will raise rates by a full percentage point next week. The consensus amongst economists and Wall Street analysts is still for a 75 basis point hike, and Powell likes to communicate and prepare markets for any changes.

But that doesn’t mean a larger hike isn’t coming at the November meeting.

“I wouldn’t discount a 100 basis point rate hike,” Marvin Loh, senior strategist at State Street, told me. “It was only a few months ago when a 50 basis point hike seemed unthinkable.”

Railroad strike averted after marathon talks

Unions and management reached a tentative deal early Thursday that averts a freight railroad strike that had threatened to cripple US supply chains and push prices higher for many goods.

The deal with unions representing more than 50,000 engineers and conductors was announced just after 5 a.m. ET in a statement from the White House, which called it “an important win for our economy and the American people.”

It came after 20 hours of talks between the unions’ leadership and the railroads’ labor negotiators hosted by Labor Secretary Marty Walsh. They began their meeting Wednesday morning with the clock ticking down to a strike that had been set to start at 12:01 am ET on Friday.

Watch this space: The agreement does not mean the threat of a strike has gone away entirely. The deal needs to be ratified by union members.

But it’s good news for a wide range of businesses that depend upon the freight railroads to continue to operate, and for the wider US economy. About 30% of the nation’s freight moves by rail.

Few details of the deal have so far been made public. But the statement from President Joe Biden indicated that the major issue that had brought the country within a day of its first national rail strike in 30 years had been addressed in the unions’ favor.

“It is a win for tens of thousands of rail workers who worked tirelessly through the pandemic to ensure that America’s families and communities got deliveries of what have kept us going during these difficult years,” Biden’s statement said. “These rail workers will get better pay, improved working conditions, and peace of mind around their health care costs: all hard-earned.”

The world’s second biggest cryptocurrency just got greener

Ethereum, the world’s second most valuable cryptocurrency, has completed a massive software upgrade that its backers claim will slash its carbon footprint.

The latest: The long-awaited revamp, which is known as “The Merge,” will reduce ethereum’s energy consumption by nearly 99.95%, according to the Ethereum Foundation, a nonprofit organization dedicated to supporting the cryptocurrency and its related technologies.

Until now, both ethereum and bitcoin were running on a mechanism called “proof-of-work,” under which high-powered computers were required to solve complex puzzles. The merger moves ethereum to a mechanism called “proof-of-stake,” which is much more energy efficient, my CNN Business colleague Diksha Madhok reports.

“Happy merge all,” Vitalik Buterin, the 28-year-old Russian-Canadian programmer who helped create Ethereum, said on Twitter. “This is a big moment for the Ethereum ecosystem. Everyone who helped make the merge happen should feel very proud today.”

The co-founder said that the upgrade will “reduce worldwide electricity consumption by 0.2%.”

While cryptocurrencies have seen a phenomenal rise in the last few years, observers say they’re terrible for the environment. A single Ethereum transaction is equivalent to the weekly power consumption of an average US household, according to Digiconomist.

Investor insight: Ethereum is down more than 1% in the past 24 hours. But analysts think it could boost adoption in the long run, especially for investors trying to align their portfolios with broader environmental goals.

Up next

Adobe (ADBE) reports earnings after the bell.

Also today: US retail sales for August arrive at 8:30 a.m. ET. Industrial production data follows at 9:15 a.m. ET.

Coming tomorrow: A first look at the University of Michigan consumer sentiment survey for September.