After the two-day monetary policy meeting, the Fed announced on Wednesday that it would maintain its interest rate policy unchanged and raised its inflation expectations for this year and next. The dot plot released by the Fed shows that the central bank will raise interest rates twice by the end of 2023, instead of the previous 2024. The data shows that 13 Fed officials currently expect the central bank to raise interest rates at least once in 2023. Five other officials insisted that the Fed will raise interest rates in 2024.
The Fed’s decision to end the era of loose money due to the new crown epidemic caused severe shocks to the US stock market, and the three major stock indexes fell in response. In the past week, the Dow plunged 3.45%, setting its biggest weekly decline since October 2020; the performance of the S&P 500 was the worst since the end of February; the Nasdaq, which is dominated by technology stocks, also fell. However, it was only 1.28% below the record high.
Last Thursday, the day after the Fed’s announcement, cyclical stocks recorded the worst one-day performance in more than a year compared to defensive stocks, as investors worried that the Fed’s measures to reduce bond purchases might derail the economy. The performance of cyclical stocks, including industrial stocks, energy stocks and financial stocks, is closely related to economic trends.
A team of Bank of America strategists headed by chief investment strategist Michael Hartnett pointed out that “cyclical stock pullbacks are underway.”
Hartnett explained that the Fed’s “hawkish” shift is “bad news”, which is undoubtedly dragged down by excessive holdings, tightening overseas regulatory policies, and the United States becoming increasingly hopeless to introduce more fiscal stimulus measures. It’s worse.
As we all know, last year, in response to the worst economic recession since World War II spawned by the sudden new crown epidemic, the Federal Reserve lowered interest rates to an ultra-low level close to zero and implemented an unlimited bond purchase plan. Now, as the economic recovery becomes stronger and inflation continues to rise sharply, the Fed has begun to consider tightening monetary policy.
In response to the central bank’s new trend, the yield on the 10-year U.S. Treasury bond fell to 1.45% last Friday. On March 31, the yield hit a high of 1.75%.
David Rosenberg, chief economist and strategist at Toronto-based Rosenberg Research, pointed out that after interest rate adjustments, the S&P 500 index is 20% higher than its intrinsic value. He believes that it would be foolish for investors to ignore the signal that real interest rates (or inflation-adjusted interest rates) are sending to the stock market.
In the report, he wrote, “Increase in defensive stocks and long-term growth stocks is a prudent strategy, because these stocks tend to benefit from a sharp slowdown in GDP growth. At the same time, if real interest rates pass The signal proved to be prescient, and investors will be advised to reduce cyclical stock exposure.”
U.S. stocks may usher in a 10-20% plunge
Mark Zandi, chief economist of the internationally renowned rating agency Moody’s Analytics, also issued a warning to investors to prepare the latter for a major market correction.
Zandi predicts that a more “hawkish” Fed will cause the U.S. stock market to plunge between 10% and 20%.
In addition, unlike the sharp decline in the past few years, Zandi does not expect this round of callbacks to recover quickly, especially when market valuations remain high. According to his estimates, it may take a year to restore breakeven.
Last Friday, in an interview, the respected economist said: “Headwinds that are not conducive to the stock market are forming. Because economic growth is so strong, the Fed has to adjust its monetary policy.” Zandi hinted that the facts Above, the callback may have begun, because investors are beginning to panic.
Despite the warning of the U.S. stock market crash, Zandi believes that the U.S. economy will avoid a recession because this round of crash is more attributable to the excessive rise in the price of risky assets rather than serious fundamental problems. He said: “Economic growth will be very strong, wage growth will also be very strong. The unemployment rate will drop to a very low level.”
In recent months, Zandi has been sounding the inflation alarm.
In early March, Zandi had predicted that inflation was “far ahead” and investors did not fully grasp the risks. According to the economist, inflation is still an issue affecting stock market and bond investors. He believes that the probability that the yield on the 10-year U.S. Treasury bond will continue to fall is very slim. “Considering the current actual situation, I would not expect the yield to remain at 1.5% for a long time,” Zandi added.
Stocks and bonds are not the only risky assets that have caught the economist’s attention. Zandi also believes that the sell-off of commodities and cryptocurrencies is creating more trouble. In addition, in the context of rising mortgage interest rates, he expressed concern about the sustainability of the strong real estate market.
Zandi said: “Inflation will be higher than the level before the outbreak of the new crown. The Fed has been working hard for at least 25 years in order to raise the inflation rate. I think they can achieve the (inflation) target.”
“The Fed continues to add fuel to the fire”
Indeed, since the outbreak of the new crown epidemic, the performance of the US real estate market has been particularly eye-catching, and it has always been a shining spot in the hard-hit economy that cannot be ignored.
Intensified price wars, full purchases, and the final sale price is 1 million US dollars higher than the asking price… The heat of the US real estate market has reached the level of “ridiculous”.
Statistics show that in April, the median price of a house reached $34,1600, the highest level since the National Association of Realtors began tracking this data in 1999. In addition, the price of single-family homes has soared 20% from last year, marking the largest increase since the association started tracking the data in the early 1970s.
Although housing prices are rising at the fastest rate on record, the Fed is still “adding fuel to the fire”: by purchasing $40 billion in mortgage bonds every month, it provides strong support for the real estate market.
Given the strong economic recovery, speculations about when the Fed will begin to withdraw from its loose monetary policy have always been heard. Now, officials of this central bank have finally started to “talk” about canceling some of the stimulus measures. However, many people worry that in the process from “starting discussion” to “starting implementation”, the Fed is creating another real estate bubble. The reason is that the Fed’s emergency stimulus measures artificially lowered the cost of mortgage loans and further pushed up the already exorbitant housing prices.
Peter Boockvar, chief investment officer of Bleakley Advisory Group, said, “The Fed is still continuing to add fuel to the fire.”
Of course, in order to prevent the economic recession caused by the new crown epidemic from turning into a full-scale recession, the Fed has made unprecedented efforts. This approach is commendable. It is this kind of effort, coupled with the large-scale stimulus measures of the US government of trillions of dollars, that have laid a solid foundation for the rapid recovery of the US economy.
However, economic data that frequently exceeds expectations suggests that it may be time for the Fed to start applying the brakes, at least with regard to the bond purchase program. “House prices are now skyrocketing,” Jason Furman, who was worried about senior economic advisers during the former US President Barack Obama’s administration, said in an interview. “The Fed may not continue to artificially lower mortgage interest rates.”
Former Fed official Danielle DiMartino Booth also believes that the most obvious starting point for the Fed to withdraw from its stimulus measures is mortgage loans. He said: “Ultra-low mortgage interest rates have fueled the enthusiasm in the housing market.”
In a press conference last Wednesday, Fed Chairman Jerome Powell (Jerome Powell) admitted that the US job market may be “very strong” in the near future, and inflation may not be as expected by many economists. Disappeared quickly.
Will the Fed raise interest rates?
Regarding the Fed’s “dovish” turning “hawkish”, market participants have more questions than answers. Perhaps the biggest question is: Will the Fed really raise interest rates?
According to reports from authoritative US business media, on the surface, the latest economic expectations issued by the Fed and Powell’s latest statement mark the central bank’s shift to a “hawkish” stance. However, taking a step back, the Fed is still as “dovish” as ever. When the consumer price index is operating at a high of 5%, saying that “prices may rise faster than expected and last longer” is hardly a “hawkish” statement. After all, inflation has exceeded expectations and has been rising for some time.
Joe LaVorgna, chief economist of the U.S. business of the French Foreign Trade Bank, pointed out that “when an economy’s debt accounts for 100% of its GDP, and economic growth is mainly driven by debt, the central bank It is difficult to implement interest rate hikes. The Fed is now in a difficult situation. I think the central bank cannot get rid of this dilemma.”