05.05.2022 – So it has done it: the Federal Reserve has raised interest rates by 50 basis points for the first time since 2000. And the stock markets are celebrating – apparently that’s a paradox. But it fits together very well, because many investors had feared even more drastic steps. The question is whether this has finally eliminated interest rate fears.
The market is likely to ponder the new situation for a while yet. Although the indices reacted yesterday with a large plus. Today, Thursday, however, U.S. futures trended weaker for the time being. Nevertheless: Yesterday, the in the S&5 500 marked the largest daily gain on an interest rate hike date since November 1978, according to “ZeroHedge”. You can see the reaction here very nicely in the hourly chart of the SPX.
Source: Bernstein Bank GmbH
The reasons for the positive development: Fed Chairman Jerome Powell rejected speculation about a 75 basis point rate hike in one step in the near future. He said, “A 75 basis point increases is not something the committee is actively considering” and added, “next couple of meetings”, would bring 50-point hikes.
Tightening as expected
In addition, the tightening turns out to be about as expected. Its balance sheet, which has grown nearly $9 trillion in the wake of the Corona prop, the Fed now wants to shrink rapidly. Starting in June, a total of $47.5 billion worth of maturing bonds each month will not be renewed, the central bank announced. By September, the monthly total is expected to pick up to $95 billion. Rumors of deeper and faster cuts had been circulating on the trading floor. Powell also made it clear that he sees the risk of a recession – which hopefully eliminates the danger of an overreaction.
Excessive pessimism
Steve Englander of Standard Chartered commented thus: Many investors would have feared a switch to 75 points and a tightening well above neutral. “So it is fair to say that positioning and excess pessimism reflect a big part of the market reaction. (…) we also saw a few tentative indications that the Fed sees a little more risk of a slowdown (or at least a moderation in activity), and that it did not want to endorse the most hawkish views under discussion at this point. (…) Overall, the tone was much more balanced than at the January and March FOMC meetings.”
Too much optimism?
However, this is by no means an all-clear signal for the bulls. In May 2000, at the last 50-point step, the interest rate had risen to 6.5 percent – shortly before the bursting of the dot-com bubble. Now, however, the U.S. key interest rate is only 0.75 to 1.00 percent. But the inflation rate in the USA reached 8.5 percent in March, the highest level in over 40 years. It is quite possible that inflation will jump even higher because of the Ukraine war and new Corona supply chain issues. At the same time, the Fed’s tightening will for the time being withdraw a lot of liquidity from the markets.
The conclusion from all this is that the Fed has calmed the nerves for now. Whether it will stay that way remains to be seen. The Bernstein Bank wishes successful trades and investments!
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