The Fed is set to conclude its two-day meeting on its policies to address the current inflationary rate and other economic pressures seen recently. Investors and strategists alike have begun to seriously speculate on the possibility of a recession, or significant economic downturn at a minimum, as they wait to see precisely how hawkish the Fed will be, reports Reuters.
Markets are awaiting news on whether the central bank will be raising interest rates, and if so, when. Of even bigger concern in the minds of investors is the potential for aggressive rate hikes in combination with the phasing out of the bond-buying stimulus, both of which in tandem could lead to serious economic slowdown.
“I am intently focused on the yield curve,” said Matthew Nest, global head of active fixed income at State Street Global Advisors. “The only way the Fed can bring down inflation is to slow demand, … and in doing so it risks causing a recession or a sharp slowdown in growth. This dynamic is causing the yield curve to flatten and increasing strain in risk markets more broadly.”
It’s a difficult position for the Fed, as there is no general consensus on how and over what kind of timeline this historic inflation will play out. Some believe that as the pandemic lessens and supply chain issues unsnarl, inflation will wane, while others believe that inflation will persist over a much longer time horizon. The Fed will have to thread a fine needle in order to assuage worried investors and markets.
The one thing that everyone can agree on is the uncertainty in the markets, and the volatility that the markets have experienced in the last few months as the Fed became increasingly more hawkish.
Gary Black, manager of the Future Fund Active ETF, said that less than two months ago, investors and strategists “were worrying about too much growth,” but now they are now very focused on the potentials for a recession. “That’s the schizophrenic nature of this market,” said Black.
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