6 February (Reuters) – US stocks could fall further and bond yields rise as the Federal Reserve continues its current round of rate hikes in the coming months, according to analysis released by the San Francisco Fed on Monday.
Financial conditions were already tightening significantly, even before the US Federal Reserve began raising interest rates last March to combat 40 years of high inflation, as investors awaited the Fed’s action.
Assuming the Fed delivers on its December forecast that interest rates will rise to 5.1% by May and inflation falls to 3.1% by then, the Fed will conduct its sharpest round of monetary tightening on record have, the San Francisco Fed researchers wrote.
Although stock prices have historically tended to rise at the end of Fed tightening cycles, this time could be different, according to analysis by San Francisco Fed senior research advisor Simon Kwan and research associate Louis Liu.
last update
Watch 2 more stories
Based on how asset prices have behaved in previous tightening cycles, they wrote, “Equity prices are expected to continue falling,” along with “further tightening in the bond market.” That’s in large part due to how loose policy was early in this cycle, when the Fed’s interest rate hovered near zero even as inflation rose, resulting in a historically large negative “real-rate gap.”
“While the rapid tightening in financial conditions is expected to slow the economy relatively quickly, historical experience raises the possibility of even more tightening in financial conditions, given the large real interest rate gap that needs to be closed,” they wrote.
Reporting by Ann Saphir in Berkeley, California; Editing by Andrea Ricci
Our standards: The Thomson Reuters Trust Principles.
Comments are closed.