Turnaround in interest rates in the USA: What the Fed’s statements mean for the stock market


Status: 01/27/2022 1:02 p.m

Although the US Federal Reserve did not raise interest rates yesterday, statements by its chief Jerome Powell are being interpreted as a signal for a series of rate hikes by the end of the year. Experts see this as a problem for the stock markets.

In the USA, there are signs of stronger interest rate increases for the current year than recently assumed. This is indicated by the development on the trillion-dollar US money market, where short-dated bonds with a maximum maturity of up to one year are traded. As expected, the US Federal Reserve (Fed) left the key interest rate in the range of 0.00 to 0.25 percent yesterday. But with his statements at the press conference that followed, Fed Chair Jerome Powell unsettled the markets.

Powell’s statements, which the markets interpreted as an indication of a rapid tightening of interest rates, attracted particular attention. He explained that the starting situation today is different from the last, rather cautious turnaround in interest rates by the Fed from 2015. Powell referred to inflation in the USA of seven percent and an unemployment rate of almost four percent, which he described as “full employment ” interpreted. Powell left open one question as to whether the Fed could raise its key interest rate at each of the seven scheduled interest rate meetings this year.

Five rate hikes are more likely

However, the markets are not yet expecting seven interest rate hikes. The day after Powell’s statements, the so-called “Fed Watch Tool” of the US futures exchange CME shows that after the last interest rate meeting of this year in December, the key interest rate is most likely to be in a range of 1.25 to 1.5 percent. In order to reach this level of interest rates, the Fed would need five interest rate hikes this year. There were four hikes before the Fed rate meeting. The probabilities for the possible key interest rate development are derived from stock exchange transactions already entered into by the market participants on the CME.

Concerns about the labor market and inflation

“The Fed is perhaps in its most difficult situation since the 1970s. The high number of voluntary redundancies by workers shows that the US labor market is heading towards full employment and continued wage increases in the competition for workers,” commented Friedrich Heinemann from the ZEW research institute . “Employees are not returning to their jobs to the extent that could have been expected. There is a shortage of workers. However, higher wages can lead to a dangerous wage-price spiral,” explained Thomas Gitzel from VP Bank.

In addition, the Fed had indicated that it would like to “shorten” its balance sheet again in the future. This means that in the future it will not only no longer buy any bonds on the market, i.e. it will discontinue its “quantitative easing” policy. Rather, it intends to pursue a policy of “quantitative tightening” in the future by no longer using the funds released from expiring bonds in its portfolio in full on the market to buy new bonds. On balance, liquidity should therefore gradually be withdrawn from the markets. This puts the Fed much further ahead than the European Central Bank (ECB).

A problem for the stock markets

The Fed’s plans do not offer the best prospects, especially for the stock markets. “This means that the years-long so-called Fed-Put is passé for the moment. Behind this is the idea that the Fed would not only keep an eye on its two goals of full employment and price stability, but also always keep an eye on the stock market and protect it from strong corrections – a kind of Security for investors. At the moment, however, exactly the opposite is the case,” explained Eckhard Schulte from MainSky Asset Management.


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