For weeks, Federal Reserve Chairman Jerome Powell has indicated that the Fed will likely raise interest rates by 50 basis points in June and July.
But after the June 10 news that consumer prices rose 8.6% in the 12 months to May, a 40-year high, investors and analysts began revising their expectations on the rise. Barclays Bank and investment bank Jefferies raised their forecasts from 50 to 75 basis points for the meeting that ends June 15, Bloomberg reported.
In the late afternoon of June 13, interest rate futures traders saw a 69% chance of a 50 basis point rise in June and a 31% chance of a 75 basis point rise. .
But Steven Englander, global head of G-10 FX research at Standard Chartered Bank, went further.
“The Fed is trying to erase any perception that it is behind the curve,” he said, according to Bloomberg.
“Fifty was the big round number six months ago. Meanwhile, 75 is a very average kind of hike. So the Fed might be saying, ‘Look, if we want to show our commitment, just do 100.’
Only 10% chance
To be sure, Englander only sees a 10% chance that the Fed will go 100 points. His base projection is still 50 basis points.
So what does all this speculation about big Fed rate hikes mean for you as an investor? It sent stocks and bonds tumbling, no doubt creating good deals in both markets.
The S&P 500 officially entered a bear market on June 13, with the index recently sitting at 3,766, down 21% from its January 3 closing high of 4,797.
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Famed Wharton finance professor Jeremy Siegel, who is usually optimistic, says now is the time to buy. “Hang on,” he told CNBC. “If you have money, start using it. You won’t regret it in a year.
The market has always recovered from previous declines, Siegel noted. “We’ve had bigger shocks in the past,” he said.
“There may still be 5%, who knows, there may still be 10%, but that.. only increases the market return going forward.”
Buy stocks and bonds
You can buy anything from stock index funds to individual stocks. You’ll probably want to stick to small amounts of whatever you choose, as stocks may drop further. By keeping some powder dry, you can buy more if the market continues to fall.
Over the past 19 bear markets, the average decline has totaled 37% from peak to trough, with an average duration of 289 days, or about 9.6 months, according to Bank of America.
As for bonds, rising yields make them more attractive to investors who want to buy individual bonds and hold them to maturity.
Treasury bills, of course, are the safest bonds. You will receive face value when the bonds mature, unless the US government defaults on its debt, which is extremely unlikely. The three-year Treasury note recently yielded 3.47%.
You can also consider double-A corporate bonds, which are considered safer than other corporate bonds except triple-A bonds. A three-year Apple bond recently yielded 3.77%.
Again, you probably want to buy small amounts because bond yields may well rise further.