How the Fed's balance sheet can address inflation – Yahoo Finance

0
2

The Federal Reserve is turning its attention to taming high inflation, but it is going to take more than just higher borrowing costs to curb price increases.
The central bank will also have to figure out a strategy with what to do with its nearly $9 trillion in asset holdings, one that could prove critical to the effectiveness of the Fed’s attack on rising prices.
The reason: abrupt Fed tightening could disrupt the bond market, risking recession.
“Interest rate hikes are yesterday’s news,” Morgan Stanley Managing Director Jim Caron told Yahoo Finance on Tuesday. Caron said the “main thrust” of Fed policy will come from how it undoes the stimulus coming from its balance sheet.
Since the pandemic began, the Fed has been snatching up trillions of dollars in U.S. Treasuries, which had the effect of depressing longer-term borrowing costs (part of the Fed’s efforts to stimulate demand). Longer-dated U.S. Treasury bonds (like the 10-year, or the 30-year) remained low through the pandemic and the subsequent recovery.
With prices rising to the tune of almost 7% year-over-year, the Fed is now trying to wind that program down to a full stop — a process it hopes to complete by March. Then, the Fed will consider raising short-term interest rates and debate ways by which it can actually reduce its asset holdings.
“We're mindful that the balance sheet is $9 trillion. It's far above where it needs to be,” Powell told Congress in testimony on Tuesday.
The question: How should the Fed time interest rate hikes with any balance sheet unwind? Does it matter?
The yield curve
Powell was mum on the Fed's thinking. But other Fed policymakers have voiced concerns about hiking interest rates into a “flat” yield curve.
Because U.S. Treasury yields serve as a sort of proxy for interest rates, a 2-year Treasury at 0.89% roughly implies the Fed could raise interest rates about 0.75% (or three interest rate hikes of 0.25% each) from its pandemic-era setting of near-zero.
But the Fed is now signaling it could get far more aggressive than that in the next few years.
The U.S. 10-year Treasury (^TNX) has risen alongside anticipation of Fed tightening. But as of Tuesday afternoon, the 10-year was floating around 1.75%, meaning that markets may not believe the Fed can credibly raise interest rates seven or eight times before shorter-term yields tilt higher than longer-term yields.
An “inversion” of this sort has historically served as a bellwether for recession
The balance sheet comes into play because unwinding asset holdings could have the effect of lifting longer-term yields, according to St. Louis Fed President Jim Bullard. He told reporters on Jan. 6 that he would expect a reduction in the size of the balance sheet to put “upward pressure” on longer-term interest rates.
“It would be a smoother process if we did the interest rate increases in tandem with a reduction in the size of the balance sheet,” Bullard said.
Kansas City Fed President Esther George similarly said the Fed needs to be mindful of long bond rates.
“I believe that it will be appropriate to move earlier on the balance sheet relative to the last tightening cycle,” George said in a speech Tuesday.
Morgan Stanley’s Jim Caron said the balance sheet is what will make the Fed rate hikes impactful, not the other way around.
“The people who are calling for just more aggressive Fed rate hikes are missing it. What they need to think about is: the Fed needs to hike rates to an optimal level, but they also need to use the shrinking of the balance sheet to tighten financial conditions as well.”
The Fed’s next policy-setting decision is scheduled for Jan. 26.
Brian Cheung is a reporter covering the Fed, economics, and banking for Yahoo Finance. You can follow him on Twitter @bcheungz.
Read the latest financial and business news from Yahoo Finance
Follow Yahoo Finance on Twitter, Facebook, Instagram, Flipboard, LinkedIn, YouTube, and reddit
The World Bank says emerging and developing countries are feeling the pinch of higher prices as well, and are already tightening policies to tamp down on inflationary pressures.
Inflation was last this high around 40 years ago, but the inflation rate was falling in the early ’80s as the Fed pushed the economy into a recession.
U.S. stock indexes rose on Wednesday after data showed that while U.S. inflation was at its highest in decades, it largely met economists' expectations, cooling some fears that the Federal Reserve would have to pull back support even more forcibly than already expected. Ten out of the 11 major S&P sectors finished higher after the news with the S&P 500 and the Nasdaq outperforming the Dow as growth stocks outperformed value. Data from the Labor Department showed the consumer price index (CPI) increased 0.5% last month after rising 0.8% in November, while in the 12 months through December, the CPI surged 7.0% to its highest year-on-year rise in nearly four decades.
GameStop's new management has to step up its game, says one of the few Wall Street analysts who still cover the retailer of physical video games.
Five years after helping the Cubs win their first World Series in over 100 years, Lester is ready to hang up his cleats.
Wall Street’s rate-hike jitters have wreaked havoc on high-growth tech stocks — and Cathie Wood’s Ark ETFs were front and center for the damage yet again.
"It certainly is not a time for optimism in the short run," a crypto analyst told Yahoo Finance.
Dozens of electric vehicle maker start-ups have appeared to capitalize on this coming sea change. Two small auto tech companies that investors should keep an eye on are Luminar Technologies (NASDAQ: LAZR) and Ambarella (NASDAQ: AMBA). In addition, tech giant Qualcomm (NASDAQ: QCOM) has been quietly building its presence in the automotive space, and looks like a great buy right now.
Amazon needs to be more transparent, says one long-time Wall Street analyst.
Last week, Eric Adams, New York City’s newly-inaugurated mayor, ignited a social media firestorm when he pointed out the obvious: big companies are hurting retail, eateries and small businesses by prolonging return-to-office plans.
If you’ve paid attention to politics in the past 10 years, you’ve likely heard a good deal of rhetoric about “the 1%” — those whose annual income puts them in the top 1% of earners. You’d be forgiven, though, for … Continue reading → The post What It Takes to Be in the 1% By State appeared first on SmartAsset Blog.
In this article, we discuss the 5 stocks to consider in the latest portfolio of that Nancy Pelosi. If you want to skip our detailed analysis of these stocks, go directly to Nancy Pelosi Latest Portfolio: 2 Stocks to Watch. The stock trading activities of lawmakers on both sides of the aisle have come under […]
Here’s one to be aware of for 2022: Value stocks will most likely beat their growth counterparts. * The Vanguard S&P 500 Growth Index exchange traded fund (VOOG) is down 5.6% year to date, while the Vanguard S&P 500 Value Index fund (VOOV) is flat. * Value groups including banks and energy stocks are crushing growth stocks like Ark Invest’s favorite names.
FCX stock led a rally among mining stocks as the copper prices climbed on hopes for robust global growth as the omicron variant recedes.
Shares of electric car upstart Lucid (LCID) lit up on Tuesday, surging 9% in response to a what was actually a pretty even-keeled report by Charles Coldicott at UK research shop Redburn. Coldicott initiated coverage of Lucid Group with a "neutral" rating and a price target of only $39, but by the time trading was done for the day, Lucid stock had topped $45 a share. Why did investors have such an enthusiastic reaction to what was essentially a "hold" rating on the stock? Well, let's take a look.
The Oregon chain's same-store sales grew 10.1% over 2020, 15.3% on a two-year basis and had an overall 8.4% growth for the entire year.
If you're looking for some worthwhile growth stocks to buy and hold through the storm, you've come to the right place. Lithium Americas (NYSE: LAC), ChargePoint Holdings (NYSE: CHPT), and Cognex Corporation (NASDAQ: CGNX) are three growth stocks that could be good buys in January. Scott Levine (Lithium Americas): If you're like most growth investors, you've undoubtedly come across plenty of ink spilled about electric vehicles since the market is expected to grow considerably over the next decade.
Increased provisions for a product recall and the pandemic's impact on the installation of its medical equipment hurt the company in the fourth quarter.
Digital currencies have great potential in a world that is increasingly going digital. Growth stocks can be volatile, too, but at least when the share price of a good business plummets, I can look at the company's revenue and profit potential to get an idea where the stock is going over the long term. For 2022, I've identified two beaten-down growth stocks that I'm ready to buy.
Shares of the blank check company Digital World Acquisition Corp (NASDAQ: DWAC) rose 14% today for no apparent reason. As a special purpose acquisition company (SPAC), Digital World Acquisition Corp went public with the intent of acquiring a private business to bring it public. In late October, the SPAC announced that it intended to merge with and take public Trump Media & Technology Group, the parent of TRUTH Social.

source

LEAVE A REPLY

Please enter your comment!
Please enter your name here