Rate Hike Likely, But Unusual

The Fed is likely to hike rates Wednesday, an unusual move given they've been cutting for two years. Futures markets are pricing in three to four hikes over the next twelve months, driven by strong job growth and persistent inflation.

This policy shift breaks from the past generation's pattern of extended easing cycles, particularly when recessions were absent. The Greenspan era's 1997 hike, justified by a "wealth effect" and low unemployment, offers a precedent. Today's conditions echo that with high investment and inflation, though global conflicts complicate the outlook.

The impact of AI investment on productivity remains a wild card, potentially mitigating inflation. However, rate hikes will likely hurt rate-sensitive sectors like housing, while having less effect on AI infrastructure. Furthermore, the shift to abundant reserves means rate hikes may not curb money supply growth as effectively as in the past.