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One number could be key to how markets trade after the Fed meets

One number could be key to how markets trade after the Fed meets
One number could be key to how markets trade after the Fed meets

The bond market is waiting for Federal Reserve officials to reveal how high they will raise interest rates. The reaction to that forecast will also have a profound impact on stocks, which have struggled as rates have risen in anticipation of a more aggressive Fed. A terminal rate – or the latest Fed forecast for the high water mark in interest rates – will be unveiled in the quarterly economic estimates released at 2 pm ET on Wednesday. That’s when the Fed will announce it will raise its target fed funds rate by 75 basis points, though there is some speculation it could move as much as a full percentage point. (equal to 0.01 of a basis point percentage) In addition to rate hikes, the market is focused on terminal rates. That projection is included in the Fed’s interest rate forecast. Currently, based on the Fed’s June projections, the final rate for 2023 is around 3.8%. These forecasts are made by Fed officials’ collective estimates, which are kept anonymous. On Tuesday, futures markets pegged the terminal rate at 4.5% by next April, but economists’ views differed widely on where the Fed’s interest rate hike could peak. Some expect a final rate closer to 4%, while others expect it to be up to 5%. With a three-quarter point increase on Wednesday, the fed funds rate range will move from 3% to 3.25%. “If we see that 4.25% is the terminal rate for the fed funds rate, I think investors will breathe a sigh of relief because it could be worse,” said Sam Stovall, chief investment strategist at CFRA. The terminal rate has become a sharp focus for investors, especially as a report on expected August consumer price inflation underscores views on how aggressive the Fed will need to be. That report sent bond yields sharply higher and stocks suffered as a result. The consumer price index showed that inflation continued to rise in August, while economists had expected it to ease slightly. The 10-year Treasury yield was at 3.55% on Tuesday afternoon, after touching a high of 3.6%. The 2-year yield was at 3.96%, after rising as high as 4%. Expectations for the Fed’s terminal rate also rose. Ahead of the August CPI report, the futures market had priced the terminal rate at about 4% for next April. As rates rose, the stock fell since the September 13 report. The Fed Dance “If you can call it the Fed dance, the bond market is ahead,” Stovall said. “Fade is the speed of music. If the Fed sounds more aggressive, they are accelerating it and, I think, that could cause the markets and the economy to step down.” According to Wells Fargo’s Michael Schumacher, yields on the 2- and 10-year notes fell after the last three Fed rate hikes – May, June and July. At the March meeting where the Fed first raised rates from zero, yields rose slightly. Yield moves inversely to price, and lower yields are seen as good for stocks. Stocks have moved higher after every Fed hike this year, going back to March, when the Fed first raised interest rates, according to Bespoke data. “I think bonds are driving stocks right now,” Schumacher said. He pointed to bond yields rising after the tepid CPI report. In the futures market, “terminal rates rose 40 basis points in 24 hours,” he said. “Stocks just disappeared.” Long-term bullish Schumacher said Powell is likely emphasizing that the Fed will keep rates on hold for a longer period of time, and not reverse course by cutting rates later next year, as some in the market expect. This is important because high for a long time means the economy will experience rates at terminal levels for a long time, a low yield that many do not expect. Schumacher said there is also a risk that Powell may turn dovish by suggesting a scenario in which the Fed could slow rate hikes. “The Fed will make it clear… that we’re going to go up to 4s [on fed funds] And stay there. But are they going to pound the idea of ​​a hard landing?” said Robert Tipp, chief investment strategist at PGIM Fixed Income. “And do they think they need much slower growth or is it going to be more, do? [they] Slow down and be more careful as we move into more restricted areas?” Strategists say the Fed may be forecasting a terminal rate, but that rate likely won’t be where it ends its cycle as the outlook for inflation and the economy remains unclear. The final rate may be higher or lower. Tipp says there’s about a 50% chance the Fed will never raise rates above 4% because economic weakness is already showing in the housing market. Bond strategists are divided on what this means for its outlook. The benchmark 10-year yield, which influences mortgage, car loan and other loan rates “The price action is anticipating a hockey fade, but it’s not representative of what we’re going to see at the end of the week “, said Ian Linzen, head of US rates strategy at BMO “We expect the 10-year yield to be lower.” The Fed will likely make several points clear, including that it does not intend to raise rates to 5% , some hope, Lyngen said. “I think the market feels fed up behind the curve, they’re going to do something outside the box,” he said. But NatWest Markets expects the Fed may indeed have a terminal rate of 5%. “I think there’s partly a recognition that rates are going to go further than we thought and stay there longer than we thought,” said NatWest’s John Briggs. “What if inflation is high?… 10-year yield at 4% isn’t that crazy.”

The article is in Bengali

Tags: number key markets trade Fed meets

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