Breaking News
0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Higher Rates, Weaker Growth: Did The Market Miss The Memo?

By Michael KramerMarket OverviewSep 24, 2021 17:34
ph.investing.com/analysis/higher-rates-weaker-growth-did-the-market-miss-the-memo-92356
Higher Rates, Weaker Growth: Did The Market Miss The Memo?
By Michael Kramer   |  Sep 24, 2021 17:34
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

This article was written exclusively for Investing.com.

The FOMC meeting came and went on Sept. 22 with a strong message that the course of monetary policy was shifting from very dovish to something that really seemed almost entirely unexpected, hawkish. It seems clear from the press conference that unless there is a significant disappointment in jobs data for September, the Fed would likely begin to taper in November. 

There was more than that in the Fed’s underlying message, and perhaps the equity market didn’t quite grasp that point. The idea is buried deep in their projections for the Federal Funds Rate, which indicates more rate hikes and sooner than previously noted. All of this as the Fed also downgraded GDP growth for the balance of 2021. 

The Fed’s message is unmistakable. Economic growth will be slower than previously thought, and monetary policy will be tightening sooner than expected.  

5-Year Treasuries Daily
5-Year Treasuries Daily

More Rate Hikes and Sooner

It seems clear that tapering is coming at the next meeting and that the Fed would like to have tapering completed by sometime around June or July of next year. What was a surprise was that the Fed is now projecting the potential for one rate hike in 2022, with the Federal Funds rate moving to 0.3%. That was a notable change from the June FOMC meeting, where no rate hikes were seen. 

More surprising is that the projects now note between three to four rate hikes by the end of 2023 in total, with the Federal Funds rate at 1%. That is up dramatically from the forecasts in June for the rate to be at 0.6%. It may seem minor, but two more rate hikes than previously anticipated isn’t. 

Slower Growth

Additionally, the Fed downgraded GDP growth in 2021 to 5.9% from 7%, a massive drop since the June meeting. They did increase the growth forecast for 2022 to 3.8% from 3.3%, which doesn’t seem to make up for the lost growth of 2021. 

The Markets Response

The bond market appears to have responded appropriately to this shift in the Fed’s stance, with rates rising on the shorter end of the yield curve. The longer end of the curve has seen rates rise as the market adjusts to the prospects of the Fed pushing rates higher over the longer term. However, with QE essentially coming to an end by the middle of next year, rates on the shorter end of the curve should rise faster than those on the longer end resulting in the yield curve flattening.  

10-2-Year Yield Spread
10-2-Year Yield Spread

The most interesting response to all of this was from equity markets, which rallied rather dramatically since the news first broke. It seems that the equity market didn’t notice or didn’t care about the potential for higher rates coming sooner than previously expected. Knowing how sensitive the market has been to the prospects of higher rates in the past, it seemed rather strange that equity prices responded positively. 

Of course, the market could simply have missed the entire concept here. When it eventually figures out the Fed’s attitude change, the market may choose to shift its stance. Of course, only time will tell, but a sleepy equity market unaware of the changes taking place could have significant and profound effects when it finally wakes up and returns to reality.

Higher Rates, Weaker Growth: Did The Market Miss The Memo?
 

Related Articles

Higher Rates, Weaker Growth: Did The Market Miss The Memo?

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (1)
Michael Davino
MichaelDavino Sep 24, 2021 20:08
Saved. See Saved Items.
This comment has already been saved in your Saved Items
Agree
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Disclaimer: Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. All CFDs (stocks, indexes, futures) and Forex prices are not provided by exchanges but rather by market makers, and so prices may not be accurate and may differ from the actual market price, meaning prices are indicative and not appropriate for trading purposes. Therefore Fusion Media doesn`t bear any responsibility for any trading losses you might incur as a result of using this data.

Fusion Media or anyone involved with Fusion Media will not accept any liability for loss or damage as a result of reliance on the information including data, quotes, charts and buy/sell signals contained within this website. Please be fully informed regarding the risks and costs associated with trading the financial markets, it is one of the riskiest investment forms possible.
Continue with Google
or
Sign up with Email