Assessment: The Federal Reserve was hawkish on raising interest rates year end 2018 but capitulated in 2019 and kept the printing press humming. Will a falling market and slower GDP growth cause another capitulation in 2022? …
One look at the market reaction, and especially rate market’s reaction – which now sees 80% odds of a March rate hike…
… to the Fed’s rather hawkish minutes, and one would be left with the impression that a hike as soon as March is inevitable which is why rates have spiked, and stocks are tumbling.
But is that really likely, especially with inflation set to anniversary its base effect surge some time in March, and with Omicron now spreading at the fastest pace on record?
The answer, at least according to some, is a resounding no.
As strategists from TD write, the surge in Covid infections is expected to dent economic growth in Q1, making it less likely for Federal Reserve to start raising rates in March. According to TD’s Priya Misra, the near certainty of the first rate hike in March is “very aggressive especially given the recent rise in COVID cases.”
Furthermore, “the spike in infections should have a modest negative impact on the economy, and signs of slowing Q1 growth could be enough for the market to push out the start of the hiking cycle. This should help pull 2y yields lower in the near-term.”
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