SYDNEY- Asian markets stood still on Wednesday as the world waited to hear from the US Federal Reserve on when it would stop buying assets and start raising interest rates, possibly piling pressure on its peers to follow.
Futureshave already priced in an end to tapering by March and a first hike to 0.25 percent in May or June, with rates approaching 0.75 percent by year end.
BofA’s latest survey of fund managers shows they favor an end to tapering in April and only two hikes in 2022, making them more vulnerable to a hawkish outlook.
Also vital will be the ultimate destination for rates given markets are currently priced for a peak of just 1.5-1.75 percent, a level that would likely not even top inflation.
“At its heart, there is an implied assumption that all the Fed has to do is tap the fed funds brake a mere 150bps, and the economy will slow sufficiently to break the inflation cycle,” noted Alan Ruskin, macro strategist at Deutsche Bank.
“Yet we have never had a cycle peak where real rates have not been above zero, which means the market’s expected terminal rate is too low and possibly far too low.”
Should Fed members agree and plot a much higher peak, it would challenge the lofty valuations of stocks and the slim yields offered by Treasuries. Right now, bonds are implying cash rates will average only 1.8 percent for the next 30 years.
The rapid spread of the Omicron variant is an added complication that could incline the Fed to be less hawkish, though recently officials have sounded more concerned about the persistence of inflation than the pandemic.
Whatever the Fed decides, it will set the bar for the central banks of the EU, UK and Japan when they meet this week, and add to pressure for further tightening in emerging markets. – Reuters
