All METARs are aware by now that the Federal Reserve has raised the fed funds rate and plans to raise to 5% to 5.5% by 1Q23. The Fed is also gradually paring its giant book of Treasury and mortgage bonds, putting upward pressure on long-term yields.
Big Banks Predict Recession, Fed Pivot in 2023
More than two-thirds of economists at 23 major financial institutions expect the U.S. to have a downturn this year
By Dion Rabouin, The Wall Street Journal, Jan. 2, 2023
More than two-thirds of the economists at 23 large financial institutions that do business directly with the Federal Reserve are betting the U.S. will have a recession in 2023. Two others are predicting a recession in 2024…
U.S. interest rates are still well below historical levels but are the highest since 2008, ahead of the global financial crisis…
Banks have tightened lending standards, and demand has weakened to near levels typically associated with recessions. The Conference Board’s collection of leading economic indicators has fallen for nine months in a row, reaching levels that have historically preceded recessions. And gauges that track overall business activity and the services and manufacturing sectors have fallen to some of the lowest levels since the Covid-induced 2020 recession…
Most outlooks predict the Fed will raise interest rates in the first quarter, pause in the second and begin cutting rates in the third or fourth quarter…[end quote]
This prediction is typical of the wishful thinking that caused the stock market to bounce up and down during 2022. Fed Chair Powell said that the Fed will maintain restrictive fed funds rate for an “extended” time until the Fed is sure that inflation will not resurge. A one-quarter pause doesn’t qualify as “extended.”
Investors Brace for More Market Tumult as Interest Rates Keep Rising
Era of ultralow bond yields and accommodative Fed policy has ended, money managers say
By Gunjan Banerji, The Wall Street Journal, Updated Jan. 2, 2023
…
Analysts at some of the biggest U.S. banks predict the stock market will retest its 2022 lows in the first half of the new year before beginning to rebound. Many investors say the ramifications of the Federal Reserve’s higher rates are just beginning to ripple through markets…
The tumult that erased more than $12 trillion in value from the U.S. stock market — the largest such drawdown since at least 2001 — is expected to continue as rates keep rising…
Money managers say they are positioning for an environment that bears little resemblance to the one to which many grew accustomed after the last financial crisis. The era of ultralow bond yields, mild inflation and accommodative Fed policy has ended, they say, likely recalibrating the market’s winners and losers for years to come. … [end quote]
Stock traders mentally set their expectations based on rates based on the Fed’s crisis fed funds rate that they kept in place far too long as the economy recovered.
The Fed has said that it now wants a “neutral” rate that neither stimulates nor slows the economy. This is a true trend change. Even when inflation comes down to the Fed’s target (if it ever does) they will not cut to zero again, barring a crisis. Not a recession, a crisis that is not likely to happen anytime soon.
If it lasts for years to come…stock valuations will not approach the bubble for years to come. And the market has a long way down to get to normal. Just like 2001.
Wendy