Central banks in the US and Japan are facing significant pressure to raise interest rates this week as global inflation concerns intensify. The US Federal Reserve is widely anticipated to lift rates by 25 basis points on Wednesday, marking the first increase since mid-2023. This expectation follows an unexpectedly high US consumer price report on September 11, leading markets to price in an 86% chance of a September hike and another by December. JPMorgan's chief US economist, Michael Feroli, indicated that failing to act could jeopardize the Fed's credibility, although he expects these actions to be a limited recalibration rather than the start of a sustained hiking cycle.
Similarly, the Bank of Japan (BOJ) is expected to raise its cash rate by a quarter point to 1.25% when it meets on Friday, with markets implying a 76% chance of such a move. The BOJ is also under pressure to adopt a hawkish stance to prevent the yen from relapsing after recent market intervention. This potential hike would be three months after a 0.25 percentage point increase in June, and observers suggest it is almost a foregone conclusion due to pressure over the weak yen and surging international oil prices. The yen has strengthened by 4% this month against the dollar, reaching 153.49 yen per US dollar, partly due to expectations of faster BOJ rate hikes.
The global financial markets are closely watching these decisions amidst a backdrop of rising oil prices and volatile bond markets. Brent crude futures were up 3.1% at $107.84 a barrel, and US crude rose 2.8% to $102.85 a barrel. US Treasury yields have also been impacted, with 2-year yields rising 26 basis points and 10-year yields adding 19 basis points last week. Despite the typical struggle equities face when the Fed begins hiking rates, Goldman Sachs' chief US equity strategist, Ben Snider, believes strong corporate earnings should support Wall Street, anticipating the bull market to continue.
