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Tag: rate hikes

  • The Fed pausing rate hikes has been a reliable stock-buying signal for 40 years — but this time may be different

    The Fed pausing rate hikes has been a reliable stock-buying signal for 40 years — but this time may be different

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    Federal Reserve Chairman Jerome Powell.Kevin Dietsch/Getty Images

    • The Fed pausing rate hikes has been a reliable buying signals for stocks for 40 years, Barclays said.

    • An expected Fed pivot to rate cuts next year will fit the pattern.

    • But Wall Street could be too optimistic about a rally this time around, analysts said.

    A dovish turn in monetary policy has long been a solid bull signal for stocks, often paving the way for equities to reach new market highs, Barclays said in a note.

    In the past 40 years, the time between the last Federal Reserve rate hike and an eventual recession has almost always led the S&P 500 to hit an all-time high. Only in 2001 did the trend fail, though the index still rose 11%.

    With the Fed’s July rate hike now looking like its final one of the tightening cycle, the pattern looks like it’s about to repeat itself. Meanwhile, markets have surged on hopes a pivot to rate cuts is coming next year. But Barclays is cautious.

    “This cycle is decidedly different than any we have experienced for the last several decades, due to the overhang of high inflation,” analysts said.

    In the past, the Fed has been able to pause rate hikes well before a recession arrives, paving the way for fresh stock market highs before the eventual downturn, they explained.

    But in periods when the central bank was trying to bring down high inflation, the span between a Fed pause and a recession tends to shrink, sometimes even overlapping.

    If that’s the case today, it could spell trouble for stocks, Barclays warned.

    “If a recession were to materialize, past periods suggest significant additional downside from here,” it said. “Strong jobs data remains the key holdout among otherwise weakening leading indicators, but we see signs that this may be approaching an inflection point.”

    Fed pause stock rallyFed pause stock rally

    Barclays Research

    Still, Barclays acknowledged that the economy’s surprising resilience for now brings the current cycle more in line with those bullish patterns over the past 40 years.

    “The recession that was always 6 months away is looking more and more like the recession that never was, with leading indicators that have been off the mark for well over a year now,” analysts wrote.

    Read the original article on Business Insider

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  • Dow, S&P 500 post modest gains Thursday as investor focus returns to banking risks

    Dow, S&P 500 post modest gains Thursday as investor focus returns to banking risks

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    U.S. stocks ended modestly higher Thursday in choppy trade as worries about potential weakness in the banking system resurfaced a day after the Federal Reserve increased hikes by 25 basis points. The Dow Jones Industrial Average
    DJIA,
    +0.23%
    rose about 73 points, or 0.2%, ending near 32,103, down about 400 points from the session’s high. The S&P 500 index
    SPX,
    +0.30%
    gained 0.3% and the Nasdaq Composite Index
    COMP,
    +1.01%
    closed up 1%, according to preliminary figures from FactSet. Stocks closed off the session’s highs, but gained ground after Treasury Secretary Janet Yellen told a Senate committee that the federal government would take extra steps to stabilize the U.S. banking system, if necessary. Stocks closed sharply lower Wednesday after the Fed raised its policy rate to a range of 4.75% to 5%, up a year ago from close to zero. But some analysts said a catalyst of the selloff was comments from Yellen indicating she wasn’t yet considering ways to guarantee all bank deposits, despite regulators providing an exception to depositors in Silicon Valley Bank and Signature Bank, which failed earlier this month. Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, told MarketWatch on Thursday that the focus should be on underwater securities at all banks, not only regional lenders.

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  • S&P 500 reclaims 4,000 mark, stocks end higher ahead of Fed rate decision

    S&P 500 reclaims 4,000 mark, stocks end higher ahead of Fed rate decision

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    The S&P 500 on Tuesday posted its highest close since the collapse of Silicon Valley Bank earlier this month, which sent shockwaves through financial markets and raised concerns about the stability of the U.S. banking system. The S&P 500 index
    SPX,
    +1.30%
    closed up about 51 points, or 1.3%, ending near 4,003, according to preliminary data from FactSet. That was its highest close since May 6, four days before the failure of Silicon Valley, the biggest bank collapse since the 2008 global financial crisis. The Dow Jones Industrial Average
    DJIA,
    +0.98%
    rose 1% Tuesday, while the Nasdaq Composite Index
    COMP,
    +1.58%
    swept to a 1.6% gain. Banks and companies with heavy exposure to rate-sensitive assets, including property loans, have been under pressure since Silicon Valley Bank’s implosion. It drew attention to some $600 billion in paper losses at banks from their holdings of “safe” but low-coupon securities that have fallen in value in the year since the Federal Reserve began rapidly increasing interest rates to combat high inflation. Those older bonds end up worth less when investors have access to new securities with higher yields, with a similar low-risk profile in terms of credit risks. The failure of several regional banks in March, plus the sale of Credit Suisse
    CS,
    +2.46%
    to rival bank UBS
    UBS,
    +11.97%
    over the weekend, has reawakened fears of potentially broader problems in the banking system as central bank have increased rates and ended an era of easy money. Even so, stocks were rallying as the Federal Reserve at the conclusion of its 2-day policy meeting on Wednesday is expected to raise its policy rate by another 25 basis points.

    See: The Fed will either pause or hike interest rates by 25 basis points. What are the pros and cons of each approach?

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  • Fed’s Powell: Strong hiring could force further rate hikes | Long Island Business News

    Fed’s Powell: Strong hiring could force further rate hikes | Long Island Business News

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    Federal Reserve Chair Jerome Powell said Tuesday that if the U.S. job market further strengthens in the coming months or inflation readings accelerate, the Fed might have to raise its benchmark interest rate higher than it now projects.

    Powell’s remarks followed the government’s blockbuster report last week that employers added 517,000 jobs in January, nearly double December’s gain. The unemployment rate fell to its lowest level in 53 years, 3.4%.

    “The reality is if we continue to get strong labor market reports or higher inflation reports, it might be the case that we have to raise rates more” than is now expected, Powell said in remarks to the Economic Club of Washington.

    Though price pressures are easing and Powell said he envisions a “significant” decline in inflation this year, he cautioned that so far the central bank is seeing only “the very early stages of disinflation. It has a long way to go.”

    Even as the Fed has raised rates dramatically — by 4.5 percentage points, to a range of 4.5% to 4.75%, the fastest increase in four decades — the job market has remained surprisingly resilient. In addition, inflation, though still high, slowed to a year-over-year rate of 6.5% in December from 9.1% in June.

    The slowdown in inflation, even while the economy has stayed healthy, has raised hopes in financial markets that the Fed might be able to achieve its goal without having to raise borrowing rates so high as to cause a steep recession.

    But Powell brushed aside that notion Tuesday.

    “There’s been an expectation that it’ll go away quickly and painlessly,” Powell said. “I don’t think that’s at all guaranteed.”

    Instead, he warned that in his estimation, “it will take some time, and we’ll have to do more rate increases and then we’ll have to look around and see if we’ve done enough.”

    Inflation has slowed at the same time that the unemployment rate has declined — a trend that defies most economic models. Powell said that phenomenon reflects the unique nature of the post-pandemic U.S. economy.

    “It’s just confounded all sorts of attempts to predict what it will do,” he said.

    Powell’s remarks Tuesday followed the moderately optimistic note he struck at a news conference last week. Speaking to reporters then, Powell noted that high inflation had begun to ease and said he believed the Fed could tame spiking prices without causing a deep recession involving waves of layoffs.

    But the Fed chair also warned then that the job market was still out of balance, with robust demand for labor and too-few workers in many industries leading employers to sharply raise wages, a trend that could help keep inflation high.

    Some Fed officials have already said the stronger-than-expected jobs report made it more likely that the central bank will have to keep raising its benchmark rate, which affects the rates on many consumer and business loans.

    Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, said Tuesday morning in an interview on CNBC that January’s outsize hiring gain showed that the Fed’s higher rates have so far had only a limited effect in slowing the economy.

    “We need to raise rates aggressively,” Kashkari said, “to put a ceiling on inflation, then let monetary policy work its way through the economy.”

    On Friday, the government issued a jobs report that suggested that the economy and hiring were even healthier than Fed officials had thought. Employers added 517,000 jobs in January, the report said, nearly double December’s gain, and the unemployment rate reached 3.4%, the lowest level in 53 years.

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    The Associated Press

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