Investors fear consequences of high Fed rate hike
2023.03.10 04:14
Investors fear consequences of high Fed rate hike
By Kristina Sobol
Budrigannews.com – Some investors are alarmed by the Federal Reserve’s promise to intensify its efforts to combat inflation because they believe it may move too aggressively after easing its stance a month ago.
Additionally, as the Fed responds to successively weak and then strong economic data, some worry that its messaging is becoming erratic.
This week, Fed Chair Jerome Powell told lawmakers in the United States that recent economic data that surprised on the upside would likely require the central bank to raise interest rates higher than anticipated.
Friday’s U.S. business and the following week’s expansion report would be key variables in deciding if policymakers would get to enormous estimated rate increments subsequent to scaling once again to a quarter-rate point climb last month, he said.
However, if the Fed does not wait for higher rates to have an effect on the economy, some people believe it runs the risk of making a policy error if it responds to recent data with larger rate increases.
According to Jay Hatfield, chief executive officer and portfolio manager at InfraCap in New York, “Overall, we believe the Fed is behind the curve.” It is too hawkish, will overtighten, and will result in a slower economy than necessary.”
The ICE (NYSE:) has begun to exhibit concerns regarding Fed overtightening. The BofA MOVE Index, a gauge of the expected volatility of U.S. treasuries, has rebounded from a low of ten months and is now close to its highest level since December.
Although it has decreased by approximately 3% since Powell’s initial appearance before lawmakers on Tuesday, it is still up approximately 2% for the year. Short-term yields have risen above longer-dated debt yields, signaling a recession, extending the Treasury yield curve’s inversion to its widest since 1981.
Money markets have valued the Fed’s return to a 50-basis-point increase at its March 21-22 meeting and a peak of approximately 5.7% in September—some 20 basis points higher than prior to Powell’s testimony. With a forecast of 6%, BlackRock, the largest asset manager in the world, was one of a slew of prominent Wall Street figures offering their predictions for how high policy rates could go.
U.S. Treasury volatility expectations have increased once more. For some investors, a return to rate increases of 50 and 75 basis points may be too far.
Cresset Capital’s chief investment officer, Jack Ablin, stated, “Investors fear the Fed is going to overdo it.” It is analogous to turning on hot water but waiting for it to pass through the nozzle. If you keep turning that dial, you will eventually burn yourself, and I fear the Fed will burn us as well.
Investors always pay close attention to the Fed’s words and actions, but market participants have paid particular attention to the Fed’s response to rising inflation pressures in the economy since the COVID-19 slowdown. It has been criticized for taking too long to focus on price control instead of fighting the economic shock caused by the pandemic.
Other than the dangers of fixing financial approach excessively far, a few financial backers are concerned the Fed might lose financial backers’ trust in the event that it moves forward rate increments rashly, said Troy Gayeski, Boss Market Specialist at FS Ventures.
According to Gayeski, “one risk is that the Fed becomes so reactive to data that they bounce back and forth from ‘inflation is a real problem’ to ‘looks like it’s under control.’
According to Gayeski, another risk is that investors may be misled into thinking that inflation is once again on the decline in response to a series of weaker data.
When Powell repeatedly mentioned the beginnings of “disinflation” during his press conference following the monetary policy meeting in February, he gave that impression to some investors. Soon, a string of data that were hotter than expected would demonstrate that the economy was stronger than the Fed had anticipated.
The Fed’s guidance that its decisions would be dependent on data is consistent with a potential return to more substantial hikes, and the decision to shift to a smaller rate hike in February was made in response to encouraging data showing a slowdown in price pressures.
In addition, Powell provided some justification on Wednesday for the advantages of slower rate hikes, stating that the economy may still be adjusting after a year of rapid increases.
However, some people contend that shifts in the Fed’s perspective are escalating market uncertainty.
According to Gargi Chaudhuri of Blackrock (NYSE:), maintaining the Fed’s view that rates need to remain higher for a longer period of time could increase the Fed’s credibility with investors. is in charge of iShares’ Americas investment strategy.
“Instead of the 50 basis points versus 25 basis points… the real test that the Fed needs to pass in terms of convincing the market (is) that inflation has not significantly dropped enough for us to expect the Fed to begin cutting rates by the end of this year,” she stated. “Instead of the 50 basis points versus 25 basis points,” she added.
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