Equity week ahead: Another big interest rate increase is coming. Foam. Rinse. Repeat

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CNN Business
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The Federal Reserve̵[ads1]7;s upcoming meeting on Wednesday will be one for the history books. The Fed will either raise interest rates by three-quarters for the third time in a row, to 3%, or it will raise them by an unprecedented full percentage point to 3.25%.

But what happens after that is anyone’s guess.

Wall Street is divided on whether the Fed will keep rate hikes aggressive in November, or whether inflationary pressures will cool enough for the central bank to slow down a bit.

As such, experts’ forecasts for the Fed’s short-term policy rate after the November meeting range from 3.5% to 4%. The outlook is even darker for December, with economists predicting rates could be as low as 3.75% or as high as 4.5%.

The big problem facing the Fed: The economy still appears to be a little too hot for its liking. Inflation is undoubtedly a big problem, but the job market is strong, consumers are still spending at a healthy clip and house prices are still high even though there has been a significant increase in mortgage rates.

“These data are likely to encourage the Fed to continue to stay in overdrive, but also increase the chances that sooner or later they will make a policy mistake by tightening monetary conditions too much to fight inflation,” said Timothy Chubb, chief investment officer at Girard, in a report.

In other words, the Fed’s interest rate increases may ultimately lead to the economy cooling more than the central bank would like.

Too many big rate hikes risk “sending the economy into a mild recession,” Chubb said. But he does not predict a major economic collapse like in 2008. It will more likely be “the recession variant of 2001, the second least bad result from an improbable soft landing”.

Even if the economy avoids a major downturn, there are growing concerns that the stock market — which has already had a dismal 2022 — could be in for more prolonged pain.

Investors have no idea where interest rates might be in the middle of next year, as forecasts for July 2023 range from a low of 3.25% to a high of 5%. Moreover, it is likely that other central banks, mainly the European Central Bank, will increase the pace and size of interest rate increases as well. That is likely to lead to even more market volatility.

“Major central banks still have work to do on inflation, including the Fed and ECB. Recession fears provide a weaker backdrop for global risk assets and the global outlook remains unusually uncertain,” Luigi Speranza, chief economist and global head of BNP Paribas Markets 360, said in a report .

Speranza said a recession in Europe “is inevitable.” And while it may not be “deep,” Speranza believes it will be “long-lasting.” As for the US, he said that “the macro outlook looks less negative than in Europe” but that “restrictive policies and below-trend growth are needed to tame inflation.”

It all serves as a rude awakening for investors, who had hoped that Fed Chair Jerome Powell might finally clip the wings of the inflation hawk and start flapping more like a monetary policy dove instead.

But unless the pace of consumer price increases begins to cool much faster and more dramatically in the coming months, the Fed will not be able to slow the pace of rate hikes anytime soon. And forget expectations that the Fed might take a break in 2023 and start signaling possible rate cuts.

The Fed, as Powell likes to say, is data dependent. And so far, it looks like all the data points to more hikes and that rates will stay higher for longer.

“This meeting is going to be very important in light of all the latest data,” said Roger Aliaga-Díaz, chief Americas economist and head of portfolio construction for Vanguard. “It is too early to talk about a pivot.”

The Great Recession may have taken place nearly fifteen years ago, but lawmakers are still keeping a close eye on America’s top banks to ensure that these firms remain financially sound — and also act responsibly.

The CEOs of seven of America’s largest lenders will appear before the House Committee on Financial Services on Wednesday and again before the Senate Banking Committee on Thursday. The title of the house hearing? “Holding Mega Banks Accountable: Oversight of America’s Largest Consumer Banks.”

JPMorgan Chase ( JPM ) CEO Jamie Dimon, Citi ( C ) Jane Fraser and Bank of America ( BAC ) Chairman Brian Moynihan will testify and be subject to questions from Congress. CEOs of Wells Fargo ( WFC ), Truist ( TFC ), PNC ( PNC ) and US Bancorp ( USB ) will also be in attendance.

The kinds of questions that are likely to come to mind: Do the banks, which have built up reserves over the past few years, have enough of a financial cushion to handle the possibility of rising delinquencies and defaults if consumers fail to make mortgage and credit card payments on time? What are the big banks doing to combat growing concerns about fraud on their Zelle digital banking platform, which competes with PayPal’s ( PYPL ) Venmo and Block’s ( SQ ) Cash App?

Lawmakers are also likely to grill the bank chiefs on other issues, including fees, predatory lending and broader concerns about the economy and housing market.

Monday: Britain’s stock market closed for Queen Elizabeth II’s funeral; revenue from AutoZone (AZO)

Tuesday: US housing starts and building permits; revenue from Stitch Fix (SFIX)

Wednesday: Fed rate decision; United States existing home sales; revenue from General Mills (GIS), Lennar (LEN), KB Home (KBH) and Trip.com (TCOM)

Thursday: Bank of England interest rate decision; US Weekly Jobless Claims; revenue from Accenture (ACN), Darden Restaurants (DRI), Manchester United (MANU), Costco (COST) and FedEx (FDX)

Friday: UK emergency budget for energy crisis