Home Interest rate Why could the Fed raise rates without freaking investors out?

Why could the Fed raise rates without freaking investors out?

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Fed Chairman Jerome Powell is expected to discuss the central bank’s plans to start cutting its bond purchases at a press conference on Wednesday afternoon.

The Fed could even suggest that interest rate hikes could also be considered for the end of next year. The rates have been at zero since March 2020.
According to CME futures, traders expect a 33% chance of at least two interest rate hikes by the end of 2022, and a 25% chance of three rate hikes. by January 2023.
So why aren’t investors launching a so-called tantrum, like they did when former Fed Chairman Ben Bernanke hinted that the Fed would slow down bond buying soon in the summer? 2013? At the time, stocks fell sharply and long-term Treasury yields skyrocketed.
This time around, everyone knows that tapering is coming. Powell has been suggesting for months that the economy is improving and may not need so much support from the Fed anymore.
That’s a big difference from almost a decade ago, when Bernanke caught the market completely off guard when he first suggested shrinking.

“The Fed has been telegraphing the cone for quite some time. They’ve learned a lot and don’t want to make the same mistake twice,” said Whitney Sweeney, investment strategist at Schroders.

No temper tantrums as long as the Fed sticks to the playbook

Even if Powell doesn’t announce the taper schedule, the market could go into a slump anyway, Sweeney said. That’s because investors want evidence that the Fed is truly confident enough in the recovery that it can pull off the proverbial cogwheels and see how the economy is doing on its own.

“Taper tantrum is unlikely to happen. But we have to wait and see how Powell discusses the rate hike cycle,” said Jim Caron, senior portfolio manager and chief strategist at Morgan Stanley Investment Management.

Caron said the Fed also appears willing to allow inflation to rise a little higher for the time being in the hope that prices will start falling next year once supply chain disruptions and the labor market will begin to weaken.

This means that the Fed would likely seek to raise rates gradually instead of acting aggressively to counter hyperinflation fears.

Joe Biden's Fed Conundrum: Stay With Jerome Powell Or Let Him Go?

The market also seems increasingly confident that corporate taxes might not increase much, if at all, anytime soon. It would also be a gift for the Fed.

Opposition to President Biden’s plan to raise the corporate tax rate of top Capitol Hill moderates, namely Democratic Senators Joe Manchin and Krysten Sinema, could doom any chance of a significant increase.

“I don’t see a corporate tax rate hike coming now. There are too many fires in Washington,” said Dan Genter, CEO and CIO of RNC Genter Capital Management.

Powell, who like most members of the Fed sticks to the mantra that the central bank is apolitical, would likely not comment on any tax proposals. But market watchers believe the Fed would have more leeway to cut and raise rates if it didn’t have to worry about investors’ reaction to the prospect of a tax hike eating into profit margins.

“The Fed generally doesn’t bet on policy outcomes,” Caron said. “But he will react to the Biden agenda in the future once the information is released.”

In other words, Powell and other members of the Fed will be able to breathe a huge sigh of relief if DC traffic jams prevent Biden from getting what he wants.

“In theory, the Fed is independent,” Sweeney said. “But higher taxes would have been a headwind. Absolutely.”


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