On Wednesday, the Federal Reserve continued efforts to control inflation by raising interest rates for the fourth time in a row and signaling that more hikes are on the way.
Stocks rallied later, with the S&P 500 jumping 2.6% on Wednesday and another 1.2% on Thursday.
The break higher has extended the roughly six-week reversal in what has been an ugly 2022 for stocks so far; through Thursday’s close, the S&P 500 has recovered about 11% from its mid-June lows.
The Fed usually dismisses moves in the stock market, but the turnaround in stocks has also coincided with an alarming turnaround in bond markets, which could spell trouble for policymakers.
Longer-term interest rates, which the Fed does not directly control, do not appear to be getting the message from Fed Chairman Jerome Powell about further rate hikes. And that could dampen the expected impact of rising interest rates, which is to help curb demand to curb inflation.
“We are concerned that some of the markets may be seeing the pivot they want to see, as opposed to a transition from one policy phase to another that is naturally more data-driven,” Evercore analysts wrote on Thursday WHAT IF.
Since the Fed’s June 15 meeting, the 10-year U.S. Treasury yield has fallen more than 0.70%, to just below 2.70% as of Thursday at afternoon As a benchmark for interest rate products, the fall could make long-term credit products (i.e. business loans) less expensive than they were a month ago.
Mortgage rates, often the biggest long-term debt for households, have similarly fallen since mid-June. Average 30-year fixed-rate mortgage the rate has fallen 0.5% over the past five weeks, standing at 5.3% as of Thursday.
The combination of higher stock prices and lower long-term borrowing costs eases financial conditions, potentially steady demand and complicates the Fed’s efforts to reduce inflation.
“[T]the substantial easing of financial conditions that occurred in response to [Wednesday’s] Ultimately, the meeting will be an unwelcome development for the Fed as it seeks to achieve price stability,” Deutsche Bank analysts noted Thursday morning.
The story continues
For his part, Powell said on Wednesday that financial conditions remain tight compared to earlier this year, adding that the impact of generally higher long-term rates “should continue to moderate growth and help to balance demand with supply”.
That is, unless conditions stop tightening even more.
“We don’t control this second step”
Fed policy works its way through the financial system in two steps: the first is short-term rates, which the Fed controls; the second is long-term rates, which are set by markets but influenced by where short-term rates are set.
The central bank began raising interest rates in March this year, raising the rates banks use to borrow from each other overnight.
But the second part of that transmission tightens broader financial conditions as longer-term rates, which affect business and consumer borrowing, are pushed higher by markets.
Until, of course, investors begin to doubt the Fed’s ability or desire to further raise rates and price investors in an economic slowdown, future interest rate cuts, or both.
“We don’t control that second step,” Fed Chairman Jerome Powell said Wednesday in response to a question from Yahoo Finance. “We’re just going to do what we think needs to be done.”
U.S. Federal Reserve Chairman Jerome Powell attends a news conference in Washington, DC, the United States, on July 27, 2022. (Photo by Liu Jie/Xinhua via Getty Images)
Until a month and a half ago, the markets seemed to have gotten the message. The US 10-year yield more than doubled in the first half of the year, from 1.5% in January to a high of 3.43% in mid-June, when the campaign began hiking
But a reversal in recent weeks, despite the Fed’s insistence this week that it will continue to raise rates, signals expectations that a recession will push the Fed to cut rates as early as next year.
The Fed’s reading of the matter is that bond markets are pricing in the expectation that inflation will decline, which Powell said is a “good thing.”
For now, Powell has only promised more interest rate hikes, with few details on the size and pace of those next moves. Powell articulated on Wednesday that at some point, the Fed could pull back from its big rate hikes, but said that additional “unusually large” moves, such as the 0.75 percent enacted during the past two meetings, remain about the table, depending on the data.
If financial conditions don’t look tight enough, the Fed chief suggested they will communicate that to the markets.
“Of course, we will be looking at the financial conditions to see that they are appropriately tight and that they are having the effect that we expect them to have,” Powell said on Wednesday.
Brian Cheung is a reporter covering the Fed, economics and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
Follow Yahoo Finance at Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTubei reddit
Click here for the latest economic news and indicators to help you with your investment decisions
Read the latest financial and business news from Yahoo Finance
Download the Yahoo Finance app for apple or android
Follow Yahoo Finance at Twitter, Facebook, Instagram, Flipboard, LinkedIni YouTube
[ad_2]
Source link
