Pivot or not: Wall Street can’t agree on the impact of future Fed rate hikes
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With an additional 75 basis point rate hike widely expected at the close of the July 27 Federal Open Market Committee (FOMC) meeting, Wall Street strategists have differing views on what the future holds for inflation and the markets — and in turn, what the Federal Reserve’s actions might be for the rest of the year.
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Bloomberg reports that Morgan Stanley strategists think it’s too soon to expect the Fed to stop tightening policy despite growing fears of a recession, which, in turn, would mean “that stocks have more headroom before finding a bottom”.
“High inflation is a real constraint for the Fed to pause or pivot, even if it has decided that a risk of recession is imminent. This is the main difference from more recent cycles and is why we believe it remains a good idea to remain defensively biased in equity positioning until further earnings disappointments are factored into consensus estimates or share prices,” said Mike Wilson, Chief investments and chief U.S. equity strategist for Morgan Stanley, said in a Morgan Stanley podcast on July 25.
Goldman Sachs strategists echoed that sentiment, saying in a July 25 note that “At this point, we would be cautious in calling for sustained pro-cyclical shifting between assets as we believe markets may underestimate risks of continued inflationary pressures, which could keep the central bank away from money for longer.
“Our economists expect the bullish cycle in Europe and the US to continue with a 75 basis point hike at this week’s Fed meeting,” Cecilia Mariotti wrote in the note sent to GOBankingRates. .
JPMorgan Chase strategists disagree, believe Fed will pivot
On the other hand, strategists at JPMorgan Chase believe bets that inflation has peaked “will lead to a Fed pivot and improve the picture for equities in the second half,” according to Bloomberg.
JPMorgan’s Mislav Matejka said tough business dynamics and slowing labor markets could open the doors to “more balanced Fed policy, leading to a spike in the US dollar and inflation,” according to Bloomberg. .
Meanwhile, Edward Moya – senior market analyst for the Americas, OANDA – wrote in a note sent to GOBankingRates that the Fed “is still in a very strong position to deliver another 75 basis point hike as inflation remains around a four-decade high and as the economy continues to create jobs at a healthy pace.
“The Fed’s Bostic, Waller, Daly, Mester and Bullard all expressed support for a 75 basis point rate hike this week. Given that the Fed has been slow to fight inflation, it should come as no surprise that it is trying to stay aggressive with tightening as the outlook darkens,” Moya wrote. “An economic downturn is looming as the speed debate remains intense. Many parts of the economy are weakening, which is why many expect the full impact of inflation to trigger a recession by the middle of next year. The risks are there for a recession later this year, but that shouldn’t be the base case. Too much of the economy is still in decent shape and some of the inflation has come down over the past few weeks.
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In June – and as expected – the Federal Reserve raised interest rates by 75 basis points, the first time it has done so since 1994. The move was widely anticipated and comes in a market that has gone into bearish territory and shows an inflation rate pegged to a 41-year high, as GOBankingRates previously reported.
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