Wall Street buzz: When will the Federal Reserve stop raising interest rates?

華爾街見聞 ·  May 25, 2022 23:47

Source: Wall Street

When the Fed stops raising interest rates may depend on three factors: the execution price of Fed put options, the psychological factors of the Fed and the speed at which corporate credit spreads widen.

When the Fed will surrender and stop raising interest rates is causing a heated debate on Wall Street.

So far this year, the s & p 500 is down 18%, close to a 20% bear market range. Markets are buzzing about when the Fed will step in to rescue the market, raise its hand to the "threat of recession" and suspend interest rate hikes.

Yesterday, Atlanta Fed Chairman Bostick tested the timing of the rate hike for the first time, saying that policy makers might suspend the rate hike in September after raising interest rates by 50 basis points in each of the next two meetings:

It may be reasonable to suspend interest rate hikes in September, depending on the economy.

At present, there are three views on when the Fed will stop raising interest rates.

The first and simplest is the strike price of the Fed's put option (the point at which the S & P 500 was forced to bail out the Fed).According to Bank of America Corporation's survey of Wall Street investors, the strike price has now fallen to 3529 from 3700 at the beginning of the year. Michael Wilson, chief U.S. equity strategist at Morgan Stanley, said the Fed will not bail out the market until at least the S & P 500s fall below 3500.

The second is the psychological factor of the Federal Reserve.Ethan Harris, an economist with Bank of America Corporation, says people familiar with the market are understandably unhappy that the S & P has fallen 17 per cent since the end of last year.

He compared it to the Fed's view of the S & P 500, adding that without an unfounded and chaotic collapse, the Fed would firmly believe that the stock market is still 15 per cent above its pre-crisis peak. He also pointed out that because in a typical consumption pattern, households react to continuous changes in prices for about three years.The Fed believes the wealth effect is still positive, so it can withstand more stock market declines.

Harris concluded that, from the Fed's point of view, the stock market correction sends two messages:This shows that investors are pessimistic about income and discount rate, and affect business confidence and consumer spending through the wealth effect.

Judging from these indicators, Bank of America Corporation's economists disappointed those eager for the Fed's surrender because the stock market "this adjustment is not prominent" because "after all, the stock market is still well above its pre-financial crisis peak. The S & P 500 has not even fallen 20 per cent. "

"Powell may think we have a long way to go, and the market correction is consistent with economic weakness," Harris said.But it is likely not to fall into recession.

But the third view is much more positive for market bulls. CreditSights, an American bond research firm, thinksThe US corporate bond market has finally sent a welcome, albeit dangerous, signal that the stock market crash is coming to an end.

The data from Credit Sights showCorporate bond spreads, which measure the interest rate premium on corporate bonds over US Treasuries, have almost doubled in the past year, in a sign of growing concerns about the performance of US companies.

This credit spread is now starting to narrow, CreditSights said, indicating that the stock market is nearing the bottom.The company studied seven periods since the S & P 500 suffered its biggest weekly decline in 1998It was found that the average rate of change in credit spreads peaked 42 days before the S & P 500 rebounded.

Winnie Cisar, head of global strategy at CreditSights, wrote in a report on Monday:

If the historical pattern continues, the absolute spread between investment grade and high-yield bonds is likely to continue to widen.

But he also pointed outThe pace of expansion should slow in the near term, while the pace of change in the stock market is likely to accelerate, bringing the S & P 500 closer to the bottom.

The turmoil in the corporate bond market is beginning and intensifying. Spreads on US investment-grade indices reached 147 basis points on Monday, according to Bloomberg.Close to 150 basis points-the threshold at which many strategists believe the corporate bond market is starting to come under pressure.

The junk bond market has been hit harder as investors lose interest in riskier bonds. The supply of new high-yield bonds is only 24% of what it was last year.

Edit / Corrine

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