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Higher interest rates test stock market as hot inflation tests the Fed


Jerome Powell, the chairman of U.S. Federal Reserve, addresses a House Financial Committee meeting in Washington, D.C. on Wednesday, December 1, 2021.

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U.S. stocks fell back on Monday, as yields on government bonds continued their climb upward. It is a sign that traders feel more sure that the Federal Reserve will raise interest rates within the next few months.

According to traders, the U.S. stock market pressure is not due to economic concerns or fear of Covid-19’s massive resurgence. It is a portfolio repositioning in a world where borrowing costs are higher.

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Congress has given the Fed the task of being the national central bank and maximizing employment. In order to maintain inflation below 2% and reduce unemployment, the Fed adjusts interest rates short term and other liquidity tools.

When the Fed determines that the economy is close to full employment – and especially if inflation is hot – it hikes interest rates to make it tougher for firms to borrow and to keep a lid on spending that fuels price increases.

According to the Labor Department, December’s report showed that prices consumers paid for goods and services increased by more than 6 percent in November. This was their highest annual increase since 1982.

Charles Schwab’s Randy Frederick is one of many market observers who believes that hot inflation printing will almost guarantee Fed rate increases in the next few months. Already, members of the central banking have telegraphed this. plan to restrict access to cash fasterIt is more than what was initially anticipated.

These expectations led to the benchmark 10-year Treasury bond yield rising in recent weeks. rate last seen up around 1.77%From a December low of 1.4%. Higher auto and mortgage rates can result in a decrease in the yield over 10 years.

Frederick, Schwab Center for Financial Research’s director of trading, said that Chairman Jerome Powell had changed the definition of inflation to “transitory”, and made it seem like the market was caught unaware.

Both of these efforts are aimed at fighting rising inflation. I believe it has gone much further and faster than that. [Powell]He said that he had anticipated. Now you can see the possibility of interest rates rising, although it looked like this might be delayed until June. It’s now almost 80% likely that it will happen by March.

Frederick’s thinking isn’t unique. Goldman Sachs revealed to clients, based on the Fed’s minutes of its most recent meeting and hot inflation, that it expects four rate rises in 2022. That is 4 more than what was originally expected.

Markets believe there is a 76% chance that the Fed will raise interest rates at its March meeting. This compares to about 15% mid-October. CME Group’s FedWatch site.

The Monday sell-off comes just days before Powell’s nomination hearing before Congress. Lael Brainard was nominated by President Joe Biden to serve as the next central bank vice-chair. He will be testifying on Thursday.

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Powell is expected to answer questions from lawmakers about how the Fed and his fellow Fed employees plan to curb inflation to get back at the Fed’s 2 percent goal.

But higher rates — or market expectations for higher rates — can cause financial heartburn as traders sell Treasury bonds and richly priced equities.

Frederick stated that “there are many new companies in the tech sector which trade at very high valuations, and have a lot of debt and leverage.” These companies may have difficulty keeping cash in the bank because of their debt.

Trading activity has been concentrated among three of the major U.S. stock indexes. It is the tech-heavy stocks that traders are selling the most recently. Nasdaq Composite. The Nasdaq has fallen 8.5% from its record high, compared with a 3.5% drop for the same period. S&P 500There was a 2.7% decline in the price of gasoline. Dow industrials. Russell 2000, which is an index that measures smaller public companies has a record of more than 12%.

Outperformed stocks and sector that were considered to be more financially secure, with higher short-term profit forecasts, over the long term. Firms that provide utilities such Xcel EnergyAnd Duke EnergyDuring drug manufacturing MerckAnd AmgenThe rise was 2% and 1% respectively.