Amid inflation fears, “Fed to raise rates again this month” ... New York stocks plunge

[Financial News]  

The U.S. September Consumer Price Index (CPI) rocked New York stocks on the 14th (local time).
The outlook for a Fed rate hike resurfaced after inflation was confirmed to be accelerating again.

The September CPI released by the Labor Department dealt a major blow to the stock market.
As oil prices climbed more rapidly amid the Iran war, the CPI rose 3.7% year over year and 0.6% from the previous month, far exceeding market expectations. The core index, which excludes energy and food prices, rose 2.6% year over year and 0.3% month over month.
The Iran war, which President Donald Trump began on February 28, drove oil prices sharply higher, stoking fears that inflation could get out of control. Trump said that he secured an agreement to resume Russian diesel exports in a phone call with Russian President Vladimir Putin on the 9th, but markets believe the actual impact will be limited.

Market expectations had been that the Fed would pause once this month and raise its benchmark rate at the December FOMC meeting, but those expectations have shifted sharply.
According to the CME Group’s FedWatch Tool, expectations that the Fed will raise rates by 0.25 percentage points at the October 27–28 FOMC meeting have risen sharply.
The probability of a rate hike jumped from 17.7% a week ago to 22.1% yesterday and 37.1% today. It is nearing the 43.5% level from a month ago.
By contrast, the probability of rates remaining unchanged fell from 82.3% a week ago to 77.9% yesterday, and dropped further to 62.9% today. A month ago, it was 53.0%.

With the midterm elections scheduled for November 3, six days after this FOMC meeting, the prevailing expectation had been that the Fed would pause rate hikes for now because of the political burden. But as inflation accelerates, forecasts that the Fed will ultimately have no choice but to raise rates despite that burden are resurfacing.
Wolf Research chief economist Stephanie Roth told Yahoo Finance today, “An October move carries a political burden.” She added, “That makes FOMC members inclined not to do it, but the data will make a rate hike unavoidable,” she said. Roth said the September CPI had rekindled the possibility of an October rate hike.

If it raises rates this time, the Fed could face suspicion that it is trying to intervene in politics by adjusting rates ahead of an election.
Previously, during a Democratic administration, the Fed raised its benchmark rate on November 2, 2022, the day before the midterm elections. Democrats strongly opposed the series of rate hikes.
Two years later, on September 18, 2024, the Fed cut rates ahead of that year’s November 5 presidential election. President Trump, then the opposition party’s presidential candidate, immediately objected, calling it “a political move to keep someone in office.” The claim was that the Fed had stepped in to help then-President Joe Biden win reelection.
Since the start of this year, Trump has pressured the Fed to cut rates by installing Kevin Warsh as chair, but contrary to his wishes, the Fed delivered its first rate hike in more than three years last September.
According to a recent analysis by Mark Shore of CME Group, the Fed has raised rates just twice before midterm elections. One hike came in 1978, and the second was in 2022. If it raises rates on the 28th of this month, it will mark the third such instance.
Shore said the Fed tends to avoid raising rates at October FOMC meetings in election years to steer clear of political controversy. The Fed did nothing during this period 67% of the time. And when it did act, a rate cut was more likely than a hike.
Shore said the Fed, including in September, “is known for not moving when an election is near.” He added, “But Warsh has already broken with the usual pattern in September. What’s to say he can’t break it in October, too?”

New York stocks swung sharply as expectations of a rate hike rose rapidly.
The three major New York stock indexes continued to fall, with semiconductor and large-cap technology stocks hit particularly hard.
Nvidia and Micron each plunged 3%, while Intel fell more than 4%. SK Hynix’s American depositary receipts (ADRs) plunged 5.9%. The leveraged exchange-traded fund (ETF) SOXL, which tracks three times the daily moves of 30 major semiconductor stocks, plunged nearly 13%.
Big Tech also struggled across the board, with Apple the only exception, rising 0.5%.
Palantir and Meta Platforms plunged around 3.5%, while Alphabet fell nearly 2%.

[email protected] Song Gyeong-jae Reporter