Rising expectations that the Federal Reserve this week will raise interest rates by more than previously forecast unsettled investors on Monday, fueling steep declines in U.S. stocks and bonds and intensifying fears over the economic outlook.
“The May inflation data was so concerning that we think the Fed will react even more aggressively in moving rates ‘expeditiously’,” BNY Mellon strategist John Velis said on Monday. His note forecast a 75-basis-point hike, up from a 50 basis-point prediction.“U.S. CPI surprised to the upside and continues to show broad and persistent price pressures,” Barclays analysts said in a Sunday note. “We think the Fed probably wants to surprise markets to re-establish its inflation-fighting credentials.
Other large investors on Wall Street said that while they do not see a 75-basis-point move as imminent, the probability of such a large rate hike in the next few months are rising.Markets reacted with a sell-off in short-dated Treasuries along with futures tied to the Fed policy rate. Yields on the two-year Treasury note are at their highest since late 2007.
U.S. corporate bonds were also pummeled over the economic outlook and companies’ ability to repay their debt.
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