NEW YORK, Sept. 23 (Reuters) – Investors are wondering how an easing of easy Federal Reserve monetary policies could affect asset prices, after the central bank signaled that a slowdown in its bond was closer than ever and suggested it might raise rates at a faster rate than expected.
In what some have described as a hawkish tilt, the Federal Reserve on Wednesday cleared the way to start cutting its monthly bond purchases as early as November, and nine of the 18 U.S. central bank policymakers forecast borrowing costs are expected to increase in 2022. read more
Fed Chairman Jerome Powell said the US central bank could complete its downsizing process around the middle of next year, as long as the recovery stays on track. Read more
The focus on rate hikes comes as investors assess how markets will react to the unwinding of the central bank’s $ 120 billion-per-month bond purchase program, which helped the S&P 500 to double by compared to its March 2020 lows.
While many expected the central bank to start relaxing before the end of the year, some investors have said the projected rate hikes could raise concerns about whether the Fed risks tightening its policy. monetary policy at a time when the economy could be significantly weaker than it is today. , which risks undermining the case for equities and other relatively risky assets.
“With this hawkish move, the Fed risks tightening its policy in a context of slow growth,” said Emily Roland, co-chief investment strategist at John Hancock Investment Management.
Stocks held onto their gains after the Fed’s statement, with the S&P 500 closing almost 1% higher.
In Treasury markets, the spread between five-year bonds and 30-year bonds fell below 100 basis points after the Fed declared policy to the lowest level since July 2020. A wider spread narrow could indicate factors such as economic uncertainty, the easing of inflationary fears and the anticipation of tighter monetary policy.
“The rate market interpreted the Fed’s communications as hawkish,” analysts at BoFA Global Research said in a note. “The more hawkish Fed is a key ingredient in our view of higher rates by the end of the year. “
The federal funds market fully accommodated a rate hike by January 2023 after the declaration, pushing forward planned rate hikes by one month.
TD Securities analysts expect the central bank to cut its asset purchases by $ 15 billion per month from November, which will help increase yields and strengthen the dollar, they said in a report.
The trajectory of the US currency is important to investors because it impacts everything from commodity prices to corporate earnings. Higher yields make dollar-denominated assets more attractive to income-seeking investors. The greenback was up 0.23% against a basket of its peers on Wednesday night.
“Once the dust settles, it appears there are enough hawkish signals to keep the dollar skewed higher, as the market considers a rate hike sooner than expected,” said Joe Manimbo, market analyst senior at Western Union Business Solutions.
Others were optimistic about the Fed’s outlook, saying the more hawkish view reflected the strength of the economy in the face of a COVID-19 resurgence.
Markets are likely to remain more focused on inference that further rate hikes in 2022 and 2023 suggest a strengthening economy than on the Fed’s cutback plan, said Mark Freeman, chief investment officer at Socorro Asset Management. .
“Powell has made it clear on several occasions (…) that the criteria for reduction are very different from the criteria for increasing rates, which are much higher” and will have more impact on the market, he said.
Rick Rieder, director of global fixed income investments at BlackRock, said in a note that strong demand for Treasuries would likely minimize the impact of the Fed unwinding.
“With the demand for income and financial assets that we are seeing (…), the modest decrease likely to be observed on the part of the Fed has no consequences for the markets,” he said.
Reporting by David Randall; Additional reporting by Sinead Carew and Gertrude Chavez-Dreyfuss; Editing by Ira Iosebashvili and Leslie Adler
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