Stock rally halted on Wednesday after the Federal Reserve announced the schedule of its first rate hike this year. It also said that it will reduce the balance sheet as soon as interest rates increase. According to Fed Chairman Jerome Powell, inflation is likely to ease next year, but it is quite difficult to be certain what the appropriate course of action should be.
On the bright side, the Nasdaq 100 performed better, after falling by more than 15% from its November peak. Dollar also rose, and the yield on 10-year bonds exceeded 1.8%. In the futures markets, traders forecast that there will be a 25 basis point increase in March, followed by a 100 basis point increase at the end of the year.
"In December, the Fed announced that it would taper its bond-buying program at a faster rate in a bid to control inflationary pressures," said Richard Flynn, managing director at Charles Schwab. "Today's announcement represents continuity, and based on the recent indications, we expect to see three more rate hikes this year, perhaps starting as early as March."
Guggenheim Partners Director Scott Minerd commented that the Fed is not trying to shock the market, even though they want to be very aggressive. "Compared to what the market has valued itself for - which was a very hawkish statement - it's pretty mild," he noted.
Jan Lingen, managing director and head of US rate strategy for BMO Capital Markets, also said: "The committee expects it will be appropriate to increase the target range shortly. They are almost committed to going up in March. Moreover, while recognizing that inflation is well above 2%, they confirmed a series of forward increases, fully in line with expectations."
After a sell-off that led to the worst month since the start of the pandemic, strategists at Goldman Sachs and Citigroup said it's time to buy. Billionaire Paul Marshall is the latest one to bet on valuable stocks that are making a comeback after years of neglect. Meanwhile, strategists at Barclays noted that mutual funds and retail investors are still very overweight in equities, so further risk reduction is possible if fundamentals deteriorate.
On a different note, latest economic readings showed that sales of new US homes climbed to a nine-month high in December, while the merchandise-trade deficit unexpectedly widened to a new record as imports continued to rise, outpacing outstripping overseas shipments.
Other reports to look forward to are:
- policy decision of the South African Reserve Bank (Thursday);
- US initial jobless claims, durable goods and GDP (Thursday);
- consumer confidence in the Euro area (Friday);
- US income and consumer sentiment (Friday).