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The Fed doubles down on message to markets — aggressive rate hikes aren't going away

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CNN Business

The US Federal Reserve is delivering a hawkish message to markets: We hear you, we see you, but you can’t stop us — aggressive rate hikes aren’t going away.

Wall Street seems to be listening. Markets now see an 86% chance of a three-quarter point hike at the September Fed meeting, according to the CME Group.

They’re also swallowing their medicine — US stocks initially plummeted on Thursday morning as they grappled with new, hawkish comments from Federal Reserve Chairman Jerome Powell on top of a three-quarter point rate hike from the European Central Bank. But by the end of the day, they had shrugged it off and markets closed higher.

What’s happening: The Federal Reserve doesn’t like to surprise financial markets with rate hikes, and so it’s making its intentions fairly clear. At least eight Federal Reserve officials spoke publicly during this week’s media blitz, and they delivered similar lines.

One by one officials acknowledged the economic and market pain their hiking policy could inflict and then reiterated that for the time being they would keep on with their aggressive regime to fight pervasively high inflation rates.

At a think tank conference Thursday, Powell reiterated his position on staying the course.

“History cautions strongly against prematurely loosening policy,” he said at the Cato Institute’s 40th Annual Monetary Conference. “I can assure you that my colleagues, and I are strongly committed to this project and we will keep at it until the job is done.”

His comments echoed Fed vice chair Lael Brainard’s, who spoke at a banking policy conference in New York on Wednesday. “It is especially important to guard against the risk that households and businesses could start to expect inflation to remain above 2% in the longer run,” she said.

Shifting course: Goldman Sachs, Bank of America and Nomura analysts all used this week’s messaging as reason to raise their forecasts for the next Fed policy decision on September 21 from a half point hike to three-quarters of a point.

Data shows the economy has been making progress towards achieving the soft landing that the Fed is hoping for. Core and headline inflation were softer in July, commodity prices are falling, the dollar is strong, and supply-chain kinks are improving. The labor market is showing early signs of cooling off, and GDP growth is also slowing.

But Fed officials have suggested that this isn’t enough. “Fed officials have sounded hawkish recently and have seemed to imply that progress toward taming inflation has not been as uniform or as rapid as they would like,” wrote Goldman Sachs researchers led by chief economist Jan Hatzius in a note Thursday.

Known unknowns: Nothing is written in stone and a slew of economic and inflation data out later this month will guide the Fed’s next moves. If next week’s Consumer Price Index report surprises to the downside, the Fed may consider a less aggressive rate hike.

“Although we move to a 75 basis point rate hike in September, we acknowledge there are risks to a smaller 50 basis point hike,” wrote Bank of America analysts. “The Fed received some negative feedback on its messaging during the last blackout period, and it may be the case that participants feel like it is time to back away from effectively pre-announcing policy rate moves.”

The passing of Queen Elizabeth on Thursday sent the United Kingdom into a period of national mourning for the country’s longest-reigning monarch.

That official period of reflection comes at a time of political and economic transition for the British economy. It’s been less than a week since Liz Truss was sworn in as the country’s prime minister and the economy is grappling with surging inflation rates, Ukraine-war induced commodity shortages, and an impending energy crisis.

Financial institutions, meanwhile, are struggling to figure out how to pay their respects to the Queen while keeping more economic chaos at bay. The Bank of England delayed its next interest rate decision, due September 15, by a week.

The London Stock Exchange, however, plans to continue on at full speed. The day of the Queen’s funeral is expected to be a public holiday, in which case the London Stock Exchange would be closed for trading, but “it is expected to remain open for trading as usual during the official period of mourning,” a spokesperson told CNN.

The UK government confirmed plans on Thursday to subsidize energy bills for households and businesses in order to protect its economy from freezing up this winter, report my colleagues Lauren Kent and Anna Cooban. The plan could cost as much as $172 billion, analysts said, but is desperately needed. Already, the average annual household energy bill has increased by 54% this year to $2,263.

Former President Donald Trump isn’t going public yet. But he lives to fight another day. 

The blank-check firm, or SPAC, seeking to merge with Trump’s new media venture and take it public, won shareholder support on Thursday to extend its merger agreement deadline to October 10, reports my colleague Matt Egan. 

SPACs — or publicly traded shell entities created to acquire or merge with a private company and take it public — typically have two years to find a company to acquire before the owners must return funds to investors.

Digital World Acquisition’s plan to merge with Truth Social owner Trump Media & Technology Group has been held up by investigations from federal authorities, leaving the fate of the $1.3 billion in cash raised in the company’s public offering and the listing of Trump Media on the stock market up in the air. 

Digital World has repeatedly delayed the merger, and shareholders at first appeared reluctant to kick the can down the road once more, reports my colleague Matt Egan. Ultimately, they came around to the decision. 

The merger agreement has also been held up because of claims that Trump Media owes more than $1 million to a contractor.

Trump shrugged off the controversy and suggested that he didn’t actually want to go public in a Truth Social post on Saturday. “In any event, I don’t need financing, ‘I’m really rich!’ Private company anyone???” the former president wrote in his typical posting style. 

Kroger reports earnings before the bell. 

Also today →

▸ European Union officials meet to discuss the energy crisis 

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