Categories
Audio Sources - Full Text Articles

The Fed just gave a veiled warning to investors: Expect more stocks pain if markets keep betting on rate cuts

Jerome Powell speaks at a Fed meetingFederal Reserve chair Jerome Powell speaking at a news conference in July 2022. The central bank has warned that there could be further pain ahead for stocks if investors start betting it will cut interest rates later this year.

Elizabeth Frantz/Reuters

  • Markets will suffer if investors carry on expecting rate cuts, according to the latest Federal Reserve minutes.
  • Bets on a Fed pivot “would complicate the committee’s efforts to restore price stability,” the minutes read.
  • Some strategists believe that the central bank is now easing up on its monetary tightening campaign as inflation shows signs of cooling.

Some Federal Reserve policymakers have signaled that financial markets could suffer if investors carry on expecting interest-rate cuts, according to minutes from the central bank’s December meeting.

The latest release from the Fed suggests it’s still premature for markets to start factoring in any loosening of monetary policy in 2023 – and that a flurry of bets to the contrary will likely necessitate more interest-rate increases to bring inflation under control.

“Participants noted that, because monetary policy worked importantly through financial markets, an unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability,” the minutes read.

The central bank slowed the pace of its current tightening campaign for the first time in December when it raised rates by 50 basis points, after four previous hikes of 75 basis points each.

Some strategists saw that move as a bullish signal for stocks, expecting the Fed to stop its rate increases in the near future and eventually pivot to cutting borrowing costs later in the year as inflation cools towards its 2% target.

But the Fed appears to have issued a veiled warning that investors piling into stocks right now would in itself be inflationary – which could then require the central bank to boost rates further at a later date.

“No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023,” the minutes read. 

“A number of participants emphasized that it would be important to clearly communicate that a slowing in the pace of rate increases was not an indication of any weakening of the committee’s resolve to achieve its price-stability goal or a judgment that inflation was already on a persistent downward path.”

The benchmark S&P 500 fell 0.3% after the Fed minutes were released at 2PM Eastern Time on Tuesday.

Interest-rate increases tend to weigh on stocks, because higher borrowing costs eat into companies’ future cash flows, reducing their overall valuation.

Savings accounts also start to offer greater yields, making it attractive for people to hold onto their cash rather than investing it.

Read more: Fed minutes and US jobs data might drive the first major market moves of 2023. Here’s what you need to know.

Read the original article on Business Insider