Federal Reserve increasingly hawkish as Powell tapers off, but market signals problems with economic growth

Investors were prepared for the Federal Reserve to announce a possible reduction in its November bond purchases in its policy statement on Wednesday, but a slowing economic recovery could mire more hawkish monetary policy actions.

The prospect of the Fed starting to slow down its monthly bond purchases this year, with a view to phasing it out by mid-2022, does not worry Daniela Mardarovici, co-head of US multi-sector bonds at Macquarie Asset. Management. It’s a “sigh of relief” as the market no longer needs this accommodation and the Fed has been carefully signaling its intention to cut back for some time, she told MarketWatch in an interview.

But Mardarovici sees the market questioning the Fed’s ability to raise interest rates, although it appears more “hawkish” after its policy meeting on Wednesday, with central bankers projecting a possible rate hike next year , she said.

“The most important piece of this puzzle is that long-term rates have actually been lower since June,” a sign that the market thinks the economy may not be strong enough for the Fed to rise “under whatever form it is, ”Mardarovici said. Long-term rates edged down while short-term rates edged up Wednesday as the market digested the details of the Fed meeting, she explained, in an “almost imperceptible” flattening of the curve. rates.

Slowing economic growth combined with rising inflation could put the Fed in a “conundrum”, according to Mardarovici. While the Fed could bring inflation under control by raising rates, doing so too quickly could hurt economic recovery.

Some investors fear the increased pace of inflation during the pandemic may persist longer than expected, with market analysts pointing to mounting pressures resulting from supply chain disruptions as well as labor market shortages. The limited supply is met by high consumer demand for goods as people have spent less on services due to fear of COVID-19.

“The reality of the situation is that we are still indebted to the trajectory of the virus,” said David Lebovitz, global market strategist at JPMorgan Chase & Co. ‘ s the asset management unit, during a telephone interview. “There are going to be ripple effects when it comes to the global supply chain.”

While persistent supply chain problems may worsen inflationary pressures for longer than expected, Lebovitz said the higher costs are still expected to prove transitory. That’s because rising inflation is a cyclical part of the pandemic rather than a structural concern, he explained.

Read: Falcons rule Fed, economists say

While the Fed seemed “a little more hawkish than expected” after its meeting this week, it’s no surprise that it is heading to hit it, and markets were “already valued for a first hike on December 22. », According to the remarks. directed by John Bellows, portfolio manager at Western Asset, during a panel on fixed income markets at the Morningstar Investment Conference on Wednesday.

But “they are moving forward with this reduction program in the context of a fairly significant deterioration in growth,” Bellows said. Against the backdrop of that risk, he said on Wednesday that “10-year and 30-year yields were actually lower.”

Thursday morning, the yield of the 10-year Treasury bill TMUBMUSD10Y,
1.399%
was trading nearly 7 basis points higher at around 1.38%. That’s still below a return of around 1.44% at the end of June, according to Dow Jones Market Data.

The “reality of peak growth in the second quarter is setting in,” Bellows said, suggesting that the decline in retail sales since April is behind expectations of slower growth in the third quarter.

Meanwhile, new economic surveys show the United States continues to grow at a rapid pace, although labor and supply shortages remain a drag on growth, MarketWatch reported Thursday. .

See: US economy continues to grow despite delta, new surveys show


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