– Strong surprises can cause more unrest – E24

Concerns about a future rate hike have caused turmoil in the markets since the new year.

Fear of frequent US interest rate hikes has weighed on the Nasdaq tech index, and last week was the worst technical week on Wall Street since 2020.

However, today it has been marked by green numbers on both European and American stock exchanges.

The US Federal Reserve (Fed) on Tuesday kicked off its two-day meeting, and there is great excitement over the comments it will make after the meeting on Wednesday at 20.00 NST.

The market is anticipating signs of a rate hike in March.

Nordea chief strategist Joachim Bernhardsen thinks it will take more than the recent stock market turmoil to change the Fed’s plans.

The labor market is tight, wage growth has picked up and there are prospects for strong growth in the US economy. The Fed switched fairly quickly from noting prolonged low interest rates to the interest rate hikes that are now being announced. This indicates that the Fed has a strong desire to slow the economy before it warms up, he says.

Therefore, he also thinks that the Fed will apparently signal that interest rates will be raised in March at tonight’s rate meeting.

To the extent that market turmoil could lead to more caution from the Fed, it will likely be more about Central Bank Governor Jerome Powell, setting a more cautious tone at tonight’s press conference, Bernhardsen explains.

– Strong surprises can cause more disturbances

The chief strategist says one contributing factor to the recent market turmoil is the certain fear that the Federal Reserve will raise interest rates and stifle growth in the economy.

Any surprises from the Fed will certainly affect the market. Bernhardsen stresses that such strong surprises on the upside could cause more turmoil in the financial markets.

He also says that it is important how the Fed justifies that they are moving faster or slower, and that a slow rise in interest rates, or no rate hike, should not be positive for the financial market if it is due to poor growth prospects.

Recently, the central bank has been talking about stepping down on its purchases of securities and bonds.

Interest rate hikes are reported fairly well, but there are many unanswered questions about how the Fed will reduce its holdings of securities. They’ve been pretty good at dripping information into the market so they’ll gradually adjust, but so far we have very little information about so-called “quantitative tightening”.

Broad expectations for a rate hike in March

– I think we can expect a clearer hint of an interest rate hike in March, says Marius Gunsholt Hof, chief economist at Handelsbanken.

A “normal” rate hike is considered a “quarter”, i.e. 0.25 percentage point. Gunsholt Hof explains that this is an increase in the rate of interest on which the market is set.

– He said that the market price increases in interest rates in March, and a total of four increases in interest rates during 2022.

This means that the signal for an interest rate hike in March will not have a particular impact on the markets, says Knut A. Magnussen, chief economist at DNB Markets.

– If there is a quarter percent increase, I don’t think the market will react to it. But if there is more, the market will react negatively to it, he says.

The US Federal Reserve holds eight meetings a year. The minutes of the previous interest rate meeting were published on January 5, where it emerged that there is a possibility that the rate hike will come earlier than expected. Wall Street’s three leading indices fell sharply shortly thereafter.

I’m afraid inflation will take hold

Until last fall, the Fed saw inflation as temporary. But after statements from Fed representatives and minutes from Fed meetings, it is clear that they now fear inflation could have a negative impact, says Gunshult.

Gunshult describes it as a 180-degree turn from the Federal Reserve and a major change in its strategy.

– The US Federal Reserve is getting more “hawkish,” he says.

In monetary policy, ‘hawks’ are often more willing to raise interest rates due to stagnant inflation than ‘pigeons’.

Gunshult explains that developments in the labor market, and the Federal Reserve’s wording regarding it, will give a clear indication of the rate hike decided by the central bank. Inflation must be high and unemployment low for the central bank to raise interest rates.

The consumer price index rose 7 percent in December, the highest level since 1982.

forecast balance sheet data

After the central bank’s interest rate meeting in December, the Fed announced that it would reduce its monthly purchases of support by $30 billion starting in January.

The Fed has been buying at least $120 billion in market securities a month since June of last year, to stimulate the economy after the pandemic downturn. The Federal Reserve is expected to complete its massive purchases of securities in March.

The minutes of the monetary policy meeting in December also contained indications from members of the Federal Reserve to this They thought about building balance. With that balance, roughly $9,000 billion, the Fed did quantitative easing. So the tightening will hurt the economy, in isolation.

Knut thought a. Magnussen said the balance will be mentioned at the press conference.

– Something will be said about her at the press conference as they started discussing it in December. But I’m not sure if they’ll provide a detailed plan for that now, he says.