Analysis: Investors brace for recession, more market turmoil after massive Fed increase

Exterior photo of the Federal Reserve Board Marriner S. Eccles building in Washington, DC, US, June 14, 2022. REUTERS/Sarah Selbiger

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NEW YORK (Reuters) – Investors’ faith in a soft landing in the US economy is being severely tested as a massive interest rate hike by the Federal Reserve raises concerns about a recession and more volatility ahead.

Analysts and investors said they believed a recession was more likely after the Federal Reserve at the conclusion of its policy meeting on Wednesday raised interest rates by 75 basis points – its largest increase in nearly three decades – and committed to making more big moves to combat rising inflation.

While stocks rallied on hope the Fed is willing to do whatever it can to combat the worst inflation in more than 40 years, few believe the deep selloff in stocks will be close to a tipping point until there are clear signs that inflation is abating. The S&P is down 22.2% year-to-date and is in a bear market.

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Steve Bartolini, bond fund manager at T.

Wednesday’s rate hike was accompanied by a downgrading of the Federal Reserve’s economic outlook, with growth now seen slowing to a rate below the trend of 1.7% this year. Analysts were debating whether the Fed would hit a “hard landing” by putting the economy into recession while raising interest rates, or whether it could curb inflation while slowing growth, implying a “soft landing”.

US central bank officials have indicated a faster path to raising interest rates, but while a further three-quarter point increase could be made at the central bank’s next meeting in July, Fed Chair Jerome Powell said such moves would not be “common”. Read more

Although Powell was confident that policymakers could plan for a smooth landing, others were less confident that the economy would emerge unscathed from what is on track to be the tightest tightening cycle since 1994. Analysts at Wells Fargo said on Wednesday that the prospects of a recession Still standing. more than 50%. Other banks that have warned of increased recession risks include Deutsche Bank and Morgan Stanley.

In fact, investors are already saying that recession risks may soon reverse the Fed’s path. Moving “stronger and faster” comes at an economic cost, ING analysts said in a note and that heightened recession risks “mean that lower interest rates will be on the agenda for summer 2023”.

A recession could mean more pain for an already battered stock market. Data from the Bespoke Investment Group showed that stagnation bear markets tend to be longer and more severe, with an average decline of about 35%. Read more

“If we end up in a recession later this year or early next year, dividends will likely fall and stocks will fall even more,” said Shaun McGold, president and co-CEO of investing at hedge fund Lighthouse Investment Partners.

Fed policymakers have indicated for weeks that increases of half a percentage point will likely be at the June and July meetings, with a possible slowdown in the pace by September. But market expectations shifted after higher US consumer price data in May, published last week, led to the largest annual inflation increase in nearly 40-1/2 years.

The Fed has faced criticism from some investors for acting too slowly in taming inflation, or being behind the curve. Read more

“The Fed is in a very difficult position, and frankly they have put themselves in it by mismanaging monetary policy and letting inflation go as high as it is,” said Michael Rosen, chief investment officer at Angeles Investment Advisors. “The so-called soft landing looks more and more fragile,” he said.

“very wise”

The S&P 500 rose 1.45% on Wednesday in what some investors said was a vote of confidence for a central bank that showed it was committed to taking decisive action against stubbornly high inflation.

Some have wondered how long this optimism will last.

Julian Brigden, co-founder and president of Macro Intelligence 2 Partners, a global macroeconomic research firm, said the Fed’s stance should not be viewed as positive for risky assets.

“It has been very hawkish and with the unemployment rate on the SEP (Summary of Economic Outlook) rising, it was a clear indication that a recession may be coming,” he said.

Economic weakness and continued volatility in stocks could lead to a rally in government bonds, which some investors said are starting to offer buying opportunities given the amount sold this year.

Yields on the benchmark 10-year Treasury, which move inversely to bond prices, have more than doubled since the start of the year, but fell back on Wednesday.

said Daniela Mardarovici, co-chair of Macquarie Asset Management’s Fixed Multi-Income Segment.

However, the bond consensus is by no means homogeneous.

“We remain very cautious, because our work indicates that inflation has not yet peaked, which may require a more aggressive stance on the part of the Fed,” Brigden said.

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Additional reporting by David Barbuscia, David Randall, Carolina Mandel and Lisa Pauline Matakal; Editing by Ira Yusbashvili, Megan Davies and Leslie Adler

Our Standards: Thomson Reuters Trust Principles.

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