Analysis: Investors brace for recession, more market turbulence after Fed’s oversized raise

The exterior of the Marriner S. Eccles Federal Reserve Board Building is seen in Washington, DC, U.S., June 14, 2022. REUTERS/Sarah Silbiger

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NEW YORK, June 16 (Reuters) – Investors’ faith in a soft landing for the U.S. economy is being severely tested as a huge interest rate hike by the Federal Reserve sparks concerns about a recession and more volatile operations in the future.

Analysts and investors said they believe a recession is more likely after the Fed, at the close of its policy meeting, raised interest rates by 75 basis points on Wednesday, their biggest increase in nearly three decades. and pledged to take further major steps to combat rising inflation.

While stocks rose on hopes the Fed is willing to go to great lengths to combat the worst inflation in more than 40 years, few believe the stock sell-off will be close to a turning point until there are clear signs. that inflation is declining. The S&P is down 22.2% so far this year and is in a bear market.

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“Volatility is going to remain high, making market participants, myself included, less interested in taking risk in general,” said Steve Bartolini, bond fund manager at T. Rowe Price.

Wednesday’s rate hike was accompanied by a downgrade in the Fed’s economic outlook, with growth now expected to slow to 1.7% below trend this year. Analysts have been debating whether the Fed will have a “hard landing” by putting the economy into recession while raising rates, or whether it can curb inflation while slowing growth, meaning a “soft landing.”

US central bank officials have signaled that a faster path of rate hikes lies ahead, but while another three-quarter point hike is possible at the next central bank meeting in July, Fed Chairman, Jerome Powell said such moves “would not be common”. read more

Despite Powell’s confidence that policymakers could engineer a soft landing, others were less confident that the economy would emerge unscathed from what is on track to be the sharpest tightening cycle since 1994. Wells’ analysts Fargo said Wednesday that the odds of a recession are now more than 50%. Other banks that have warned of rising recession risks include Deutsche Bank and Morgan Stanley.

Indeed, investors are already saying that recession risks could cause the Federal Reserve to change course soon. Analysts at ING said in a note that moving “faster and faster comes at an economic cost” and that rising recession risks “mean rate cuts will be on the agenda by summer 2023.”

A recession could spell more pain for an already battered stock market. Bear markets accompanied by a recession tend to be longer and steeper, with an average drop of around 35%, data from Bespoke Investment Group showed. read more

“If we ended up in a recession late this year or early next year, stock gains would decline and stocks would probably fall even further,” said Sean McGould, president and co-chief investment officer at hedge fund firm Lighthouse Investment Partners. .

Fed policymakers had signaled for weeks that half a percentage point hikes would be likely for the June and July meetings, with a possible slowdown in pace for September. But market expectations changed after the highest US consumer price data for May, released last week, led to the biggest annual rise in inflation in nearly 40 1/2 years.

The Fed has faced criticism from some investors for moving too slowly to control inflation or for being behind the curve. read more

“The Fed is in a very difficult position that, frankly, they’ve gotten themselves into by mishandling monetary policy and allowing inflation to rise as high as it has,” said Michael Rosen, chief investment officer at Angeles Investment Advisors. “The so-called soft landing is looking more and more tenuous,” he said.


The S&P 500 rose 1.45% on Wednesday in what some investors said was a vote of confidence for a central bank that showed it was committed to taking decisive action against stubbornly high inflation.

Some questioned how long that optimism would last.

Julian Brigden, co-founder and chairman of Macro Intelligence 2 Partners, a global macroeconomic research firm, said the Fed’s stance should not be seen as a positive for risk assets.

“It was extremely aggressive and with the increase in unemployment in the SEP (summary of economic projections), a clear nod to the possibility of a recession,” he said.

Economic weakness and continued volatility in equities could fuel a rally in government bonds, which some investors said were beginning to present buying opportunities given how much they have sold off this year.

Benchmark 10-year Treasury yields, which move inversely to bond prices, have more than doubled since the start of the year but plunged on Wednesday.

“After this meeting, our comfort level with the stability of the long end of the curve, the 10-year and 30-year portion of the yield curve, has increased dramatically,” said Daniela Mardarovici, co-head of multi-sector fixed income for Macquarie Asset. Management.

However, the consensus on bonds is not monolithic.

“We remain extremely cautious,” Brigden said, “because our work suggests that inflation has yet to peak, which may require an even more aggressive stance from the Fed.”

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Reporting by Davide Barbuscia, David Randall, Carolina Mandl, and Lisa Pauline Mattackal; edited by Ira Iosebashvili, Megan Davies and Leslie Adler

Our standards: The Thomson Reuters Trust Principles.

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