Last week saw the end of the Fed’s regular meeting. Immediately after the results of the meeting, volatility in the market increased, something that has not happened in quite a while. Let’s get into the details.
Investors were interested in two main questions. Whether inflation will rise. And if it does, what is the Fed going to do about it. The answers were as follows. Inflation will rise and the Fed is not planning to do anything in the near future. That is, money will continue to be printed, with interest rates remaining low for a long period of time. And a very important clarification. It’s about the rates that the Fed is setting.
The promise to keep today’s pace of asset purchases at $120 billion per month, along with a zero rate for as long as necessary. There was also a more optimistic outlook for economic growth. Labour market expectations are also seen as better.
The most important thing the Fed is focusing on is inflation. Or rather its prospects. The Fed believes that we are only seeing a short-term spike which will not continue into 2022 and 2023.
Did the markets believe what they were told?
The emotional reaction on Wednesday evening was convincing. Stock markets, oil and gold rose. And the dollar index fell. However, already on Thursday the correction began. Investors, after rethinking what they heard, came to the conclusion that the Fed was not convincing enough.
The best proof is the continuing rise in the yields of American Treasuries. For 10-year bonds investors can currently expect a yield of 1.75%. Compare that to the declared zero interest rate from the Fed.
Recently we have taken a detailed look at the relationship between the stock market and bond markets. And we explained that there was no bubble in stocks because bond yields were extremely low by historical standards. We also showed why rising bond yields are extremely dangerous for the stock market. Nothing terrible has happened yet. But the trend set is becoming less and less pleasing to big investors and “smart money”.
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