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Money markets and giants including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc now see the Fed boosting rates by 75 basis points. Image Credit: Reuters

Stocks climbed, Treasury yields sank and the dollar stabilised, with traders betting the Federal Reserve will deliver its biggest rate hike in almost three decades to curb rampant inflation and avoid steeper tightening down the road.

The S&P 500 rebounded after its worst five-day rout since the onset of the pandemic, while the tech-heavy Nasdaq 100 outperformed. Parts of the fixed-income market are signaling confidence in the Fed’s effort to fight price pressures. The 10-year breakeven rate on Treasury inflation protected securities - or the difference between those yields and the ones on typical government bonds - dropped. The flattening yield curve is sending the same message.

Money markets and giants including Goldman Sachs Group Inc., JPMorgan Chase & Co. and Barclays Plc now see the Fed boosting rates by 75 basis points. The last time officials hiked by that amount was under then Chair Alan Greenspan in 1994.

The Fed chief indicated in May that officials would move forward with half-point moves in June and July as long as economic data came in as expected. But in the past few days, inflation figures have surprised to the high side, making investors bet on a bigger hike.

For that reason, the highly scrutinised dot plot, which the central bank uses to signal its outlook for the rate path, may not reflect the latest thinking by Fed officials - given that participants had to submit their projections before this week’s market developments.

“We expect a 75-basis-point hike. We would say that’s baked into the market,” said Anna Han, equity strategist at Wells Fargo Securities. “We want to have confidence in the Fed, we want to believe that they’re seeing what we’re seeing and that they’re not going to let inflation run away to their best ability starting now.”

Sam Zell, founder of Equity Group Investments, told CNBC that if he were the chairman of the Fed, he would raise rates by a full point Wednesday. Zell believes the central bank’s credibility “has been lost” and it needs to do something to regain it and convince the world that it intends to “get control” of inflation. Late Tuesday, Pershing Square founder Bill Ackman said officials would be better off by raising rates 100 basis points “tomorrow, in July and thereafter”. He noted the central bank has allowed inflation “to get out of control” and called for “aggressive action” that would help restore market confidence.

If recent history is any guide, the Fed meeting potentially offers a chance for stocks to enjoy a little rally. Over the past year, the S&P 500 moved higher after six out of eight Fed rate decisions. In January and March, stocks rose about 6 per cent and 9 per cent in the days following the central bank’s gatherings - rebounding from steep losses leading into the announcements.

On the economic front, US homebuilder sentiment slid to a two-year low in June as rising inflation and higher mortgage rates weighed on housing demand. Retail sales fell in May for the first time in five months, restrained by a plunge in auto purchases and other big-ticket items. A gauge of New York state manufacturing activity unexpectedly contracted for a second month in June, while a measure of inflationary pressures at producers picked up.

Elsewhere, the European Central Bank accelerated work on a new tool to combat unwarranted jumps in euro-area bond yields as markets strain at the prospect of the first rate increases in more than a decade. Following an emergency meeting Wednesday, convened after Italian yields surged to the highest since Europe’s sovereign-debt crisis, the Governing Council said it’s instructed committees to create a new instrument to tackle so-called fragmentation.

Meantime, Bitcoin tumbled again, driving the token to the brink of $20,000 as evidence of deepening stress within the crypto industry kept piling up.