Displaying items by tag: fed

Quantitative easing was the process of flooding the market with money in exchange for buying up long-term government debt and MBS; quantitative tightening was coined by Citigroup in order to describe the unwinding of this process. Goldman Sachs says this is causing increased volatility and sapping liquidity out of the treasury market. This QT could come with an abundance of arbitrage opportunities particularly in U.S. interest rate markets. Additionally, Goldman says QT will widen the gaps in new and old securities and narrow treasury yields and swap rates. F

INSUM: The treasury market is ripe for turmoil with the upcoming rate hike in March.

Many investors and lots of market data suggested that interest rate hikes to the federal funds rate were coming at this last FOMC meeting. However, the Fed made a minor splash by withholding on hiking interest rates, but almost guaranteeing them in march. Higher borrowing costs will come in large part due to rising inflation and running a very tight labor market. Powell said this latest economic expansion varied drastically from the previous with significant growth and higher inflation. Powell also signaled that the Fed will soon begin to unwind the balance sheet as they raise rates. Treasury yields were already on the rise after the Feds statement and stocks ended in losses on the news too.

FINSUM: When the rate hikes come they most likely only happen on the Feds March, June, September, and December meetings because the Fed views its large ‘Summary of Economic Projections as critical to their forward guidance policy.

Goldman and many other Forecasters have upped their projections for the number of rate hikes in 2022, but most are calling for a timid four in order for the fed to better combat inflation. CEO of JPMorgan Dimon, however, sees a much more aggressive Fed. Dimon says the Fed will hike rates six or seven times in 2022, which would bring the baseline FFR up to a whopping 2%. Dimon says 200 basis points used to be an overnight adventure for the Fed during the Volcker administration. Despite these wildly hawkish projections Dimon still sees the fed threading the needle and maintaining a balanced growth path while fighting inflation. Others called Dimon’s projections irresponsible and said the market would suffer greatly for hikes that severe.

FINSUM: There is no way the Fed could hike rates 2% in 2022 and maintain a balanced growth path, however, the Powell Fed bringing inflation back down and not taking the economy is still the most likely outcome, just not under seven rate hikes.

hroughout 2021 one of the biggest worries for investors, business owners, and policy makers has been the return of inflation. Long dormant, inflation has surged as markets and economies recover from the COVID-19 pandemic ... [Read More]

Goldman Sachs updated its path for Fed tightening in 2022 calling for four rate hikes instead of three in 2022. This is a fairly aggressive path for tightening as the current Fed target interest rate is between 0%-.25% which means it will hit around 1-1.25 by Goldman’s forecast. The biggest reason for the rate rises is the tightening labor market. Previously the Fed leaned on slack in the labor market as an excuse to brush off inflation concerns but now they are no longer doing that. Goldman has the hikes penciled in for each quarter March, June, September, and now December. Goldman saw regional San Francisco President Mary Daly’s comments of shedding some balance sheet weight of indicating the Fed’s future path.

Finsum: The Fed hasn’t tightened this quickly in the post-financial crisis era, but broadly the markets and yields are in lock step with Goldman’s predictions.