NEW YORK- As the Federal Reserve takes initial steps toward removing its massively accommodative policy, investors are preparing for the main show ahead.
Fed officials on Wednesday penciled in two potential rate hikes in 2023, sooner than policymakers had previously projected, and Chair Jerome Powell edged closer to unveiling plans to taper the Fed’s $120 billion a month of bond purchases. Powell went so far as to describe the two-day gathering as the “talking-about talking-about meeting,” a glib reference to his protestations earlier this year that he and his colleagues were not even “talking about talking about” tighter policy.
“The Fed is making it clear that they will wait and wade through a noisy summer of data to see a trend before they make a decision about liftoff,” said Jason England, global bonds portfolio manager at Janus Henderson.
England expects to see greater bond market volatility leading up to the central bankers’ confab in Jackson Hole, Wyoming, in late August and remains focused on shorter-duration bonds in anticipation of a sustained economic recovery.
The question of when exactly the Fed will pull back has hung over financial markets. Stocks edged lower and the dollar spiked on Wednesday while benchmark yields rose.
“The logical response to today’s information is that interest rates are going to go higher, and they will probably be going higher faster than people may have thought,” said Marcus Moore, assistant portfolio manager at Zeo Capital Advisors.
A more extreme reaction could lay ahead if signs appear of stronger-than-expected inflation and other factors that could push the Fed to taper faster than anticipated, some market participants said. Powell said policymakers are not facing a situation where they are “behind the curve.” – Reuters
