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Investors adjust as the Fed hikes and worry about clouds on the horizon

FILE PHOTO: A trader waits for a news conference on the floor of the New York Stock Exchange in New York
FILE PHOTO: A trader waits for a news conference on the floor of the New York Stock Exchange in New York September 17, 2015. REUTERS/Lucas Jackson/Files

March 17, 2022

By David Randall, Davide Barbuscia and Saqib Iqbal Ahmed

NEW YORK (Reuters) – Investors are racing to find out how much monetary tightening the economy can handle as the Federal Reserve begins its cycle of tightening interest rates, with some anticipating an even steeper path while others fret over potential missteps.

The Fed’s first rate hike since 2018 on Wednesday seared markets, but the central bank surprised by forecasting the equivalent of a quarter-point rate hike at each of its six remaining policy meetings this year.

Rising interest rates should tame sky-high inflation, which is affecting people’s ability to buy everyday items, but they risk sapping growth and plunging the economy into recession. Nonetheless, Fed Chair Jerome Powell expressed confidence that the economy could thrive despite less accommodative policies.

“The Fed is (trying) to fix the ship,” said Andy Kapyrin, RegentAtlantic’s chief investment officer. “My expectation is that they will become more restrictive as the year progresses, especially if inflation remains high.”

Kapyrin is increasing the overweight to value stocks – stocks of relatively cheap, economically sensitive companies that tend to thrive in an environment of strong growth and higher interest rates – and floating rate bonds, which he expects will benefit from rising borrowing costs.

The speed at which the Fed is moving has drawn some comparisons to former Fed Chairman Paul Volcker, who raised rates sharply in 1979 to fight double-digit inflation, with analysts at research firm Bespoke saying Powell had a “mini Volcker -Moment”.

Clarity on the Fed’s projected rate hike path and the central bank’s insistence that the economy is strong enough to handle a cocktail of monetary tightening, higher inflation and volatile commodity prices in the wake of Russia’s invasion of Ukraine reassured some.

“The big overhang for the market was uncertainty about what the Fed would do, and now we have a rate path,” said Jay Hatfield, portfolio manager at Infrastructure Capital Advisors.

The benchmark S&P 500 index closed more than 2%, a move that some investors took as relief that the Fed has launched its inflation war.

However, the pace of rate hikes and balance sheet tightening could weigh on the economy. Powell said details of reducing the Fed’s nearly $9 trillion balance sheet could be finalized in May.

“It’s good that the Fed has somehow left it unclear when it will start reducing its balance sheet,” said Troy Gayeski, chief market strategist at FS Investments. “We have real concerns about whether markets can continue to function as the Fed begins to empty its balance sheet more aggressively.”

EYES ON RISK

The Treasury market showed some concern about future growth, with some shorter-dated Treasury yields rising above longer-dated ones, a sign that investors are eyeing future economic risks.

The yield curve between 2-year and 10-year bonds flattened, the yield spread between 5-year and 30-year bonds narrowed to the smallest since October 2018, and yields on 5-year bonds rose above those on 10-year bonds, shows for inversion for the first time since March 2020.

An inverted yield curve has been a reliable predictor of past economic downturns in key parts of the curve, although the closely watched parts of the curve most associated with a recession have not yet inverted.

“The longer that curve stays flat or flattens out, or if it starts to invert throughout the curve, that would be a concern for us,” said Joe Bell, chief investment officer at Meeder Investment Management.

Fed policymakers began to price in new risks to the global economy, lowering their GDP growth estimate for 2022 to 2.8% from the 4% forecast in December.

“They don’t have a great record of developing ‘soft landings,'” said Matthew Nest, global head of active fixed income at State Street Global Advisors, who expects the economy to contract in the first half of 2023.

But there could be relief if commodity prices fall, said Tony Rodriguez, head of fixed income strategy at wealth manager Nuveen, which focuses on low-quality mortgage bonds and high-yield corporate bonds. That could take pressure off the Fed to cut rates as much as it has projected, he said.

“If we’ve learned anything over the past two years, it’s that most of the time the Fed’s economic forecasts are a little off,” he said.

(Additional reporting by Carolina Mandl, editing by Ira Iosebashvili, Megan Davies and Richard Pullin)

https://www.oann.com/investors-adjust-as-fed-hikes-worry-about-clouds-on-horizon/?utm_source=rss&utm_medium=rss&utm_campaign=investors-adjust-as-fed-hikes-worry-about-clouds-on-horizon Investors adjust as the Fed hikes and worry about clouds on the horizon

DUSTIN JONES

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