Federal Reserve and the markets in standoff on rate hikes

WASHINGTON (AP) — Sooner or later, either Wall Street or the Federal Reserve has to blink.

Nearly a year into the Fed’s drive to quash inflation by hiking interest rates at a blistering pace, investors still don’t seem to fully believe what the Fed warns is coming next: Higher rates through the end of the year, which could sharply raise unemployment and slow growth.

Wall Street has a more sanguine view: With inflation cooling from painful highs, investors are betting that the Fed will stop hiking rates soon, pause for a bit and then start cutting rates toward the end of the year to combat what many on Wall Street expect will be a mild recession. That relatively optimistic view has helped propel the broad S&P 500 stock index up 4.4% so far this year.

Yet a host of Fed speakers last week underscored a contrasting message: They expect to raise their benchmark rate above 5%, modestly above Wall Street’s forecast. Doing so would likely lead to even higher borrowing rates for consumers and businesses, from mortgages to auto loans to corporate credit. What's more, some Fed officials reiterated they plan to peg rates at a higher level through the end of this year.

The gap between the Fed's projections and Wall Street's expectations could have far-reaching consequences for Americans' finances as well as for the economy.

For investors, rate cuts serve almost like hits of steroids. They make borrowing less expensive, and they typically juice prices for everything from stocks to bonds to cryptocurrencies. That’s why investors are so hungry to sniff out when the next rate cut could occur, hoping to get in ahead of it and derive the most benefit from the resulting rise in the prices of stocks and other assets.

If, on the other hand, the Fed follows through on its warnings of...