Will 75 bps US Fed rate hike trigger another market selloff?

As consumer inflation race d to a 41-year high in May, the US Federal Reserve will be determined to increase interest rates by at least 50 basis points at the end of its two-day policy meeting later today.

FOMC minutes in May, too, signaled commitment to raise interest rates, reduce balance sheet and move into the ‘restrictive’ territory. 
 

Analysts at HSBC believe the Fed will launch three series of 50 bps rate hike in June, July, and September, global investment bankers like Barclays and Jefferies make the case for 75 bps rise in interest rates. 

However, if the US Fed raises the benchmark rate by 75 bps, it would be the biggest hike seen since 1994.

Analysts fear this would ultimately unsettle global investors and fuel steep declines in the US equity as well as bond markets.

As far as this week’s policy is concerned, markets are baking in 65 per cent chances of a 75-bps rate hike. But, analysts believe that an extremely hawkish commentary from the US Fed would roil the markets going ahead.

Vineet Bagri, Managing Partner, Trustplutus Wealth India, food, fuel prices driving inflation, US Fed in dilemma whether to front load rates now vs months ahead. Markets baking-in 65% chances of 75-bps hike in June and one can expect steeper hikes ahead as well. He says an extremely hawkish commentary will trigger broad-based fall in asset prices.

Kunal Valia of Waterfield Advisors, too, believes that the 75 bps rate hike would trigger a broader market selloff. 

Kunal Valia, Chief Investment Officer - Listed Investments, Waterfield Advisors, said US Fed may announce 50-bps rate hike, and may announce several hikes over the next 2 years. QE tightening programme to gather pace and expect extremely hawkish commentary. He said 75-bps hike will dent market sentiment further; trigger broad-based sell-off

Historically, the US Fed has kept interest rates in the range of 2 to 4 per cent to balance growth. 

The global central bank started to raise interest rates from January 2022 to tame the red-hot inflation. Till now, it has launched three-series of rate hikes, totaling to one per cent. 
 

Given this, the tech-heavy NASDAQ Composite has bled the most, sinking over 31 per cent so far in 2022. 

VO continues>Meanwhile, the S&P 500 and Dow Jones have slipped over 21 per cent and 16 per cent, respectively, during the same period.

Moreover, the US 10-year treasury yields have climbed over 1 per cent this year.

Overall, an unexpected rate hike may send markets into a tailspin, casting a spillover effect over others as well.