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Higher Rates, Weaker Growth: Did The Market Miss The Memo?

By Michael KramerMarket OverviewSep 24, 2021 05:34AM ET
www.investing.com/analysis/higher-rates-weaker-growth-did-the-market-miss-the-memo-200602973
Higher Rates, Weaker Growth: Did The Market Miss The Memo?
By Michael Kramer   |  Sep 24, 2021 05:34AM ET
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This article was written exclusively for Investing.com.

The FOMC meeting came and went on Sept. 22 with a strong message that the course of monetary policy was shifting from very dovish to something that really seemed almost entirely unexpected, hawkish. It seems clear from the press conference that unless there is a significant disappointment in jobs data for September, the Fed would likely begin to taper in November. 

There was more than that in the Fed’s underlying message, and perhaps the equity market didn’t quite grasp that point. The idea is buried deep in their projections for the Federal Funds Rate, which indicates more rate hikes and sooner than previously noted. All of this as the Fed also downgraded GDP growth for the balance of 2021. 

The Fed’s message is unmistakable. Economic growth will be slower than previously thought, and monetary policy will be tightening sooner than expected.  

5-Year Treasuries Daily
5-Year Treasuries Daily

More Rate Hikes and Sooner

It seems clear that tapering is coming at the next meeting and that the Fed would like to have tapering completed by sometime around June or July of next year. What was a surprise was that the Fed is now projecting the potential for one rate hike in 2022, with the Federal Funds rate moving to 0.3%. That was a notable change from the June FOMC meeting, where no rate hikes were seen. 

More surprising is that the projects now note between three to four rate hikes by the end of 2023 in total, with the Federal Funds rate at 1%. That is up dramatically from the forecasts in June for the rate to be at 0.6%. It may seem minor, but two more rate hikes than previously anticipated isn’t. 

Slower Growth

Additionally, the Fed downgraded GDP growth in 2021 to 5.9% from 7%, a massive drop since the June meeting. They did increase the growth forecast for 2022 to 3.8% from 3.3%, which doesn’t seem to make up for the lost growth of 2021. 

The Markets Response

The bond market appears to have responded appropriately to this shift in the Fed’s stance, with rates rising on the shorter end of the yield curve. The longer end of the curve has seen rates rise as the market adjusts to the prospects of the Fed pushing rates higher over the longer term. However, with QE essentially coming to an end by the middle of next year, rates on the shorter end of the curve should rise faster than those on the longer end resulting in the yield curve flattening.  

10-2-Year Yield Spread
10-2-Year Yield Spread

The most interesting response to all of this was from equity markets, which rallied rather dramatically since the news first broke. It seems that the equity market didn’t notice or didn’t care about the potential for higher rates coming sooner than previously expected. Knowing how sensitive the market has been to the prospects of higher rates in the past, it seemed rather strange that equity prices responded positively. 

Of course, the market could simply have missed the entire concept here. When it eventually figures out the Fed’s attitude change, the market may choose to shift its stance. Of course, only time will tell, but a sleepy equity market unaware of the changes taking place could have significant and profound effects when it finally wakes up and returns to reality.

Higher Rates, Weaker Growth: Did The Market Miss The Memo?
 

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Higher Rates, Weaker Growth: Did The Market Miss The Memo?

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Comments (15)
Fungus Amongus FA
Fungus Amongus FA Sep 26, 2021 11:56AM ET
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market didnt miss the memo, dont you trade the market using fundamentals ..
Jesus Iglesias
Jesus Iglesias Sep 24, 2021 10:58PM ET
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Sorry, but this author adds more and more misconceptions. Reality: examples, NASDAQ  and S&P 500 ==>  _Still_ Very Bullish (main trend).
Doug Favell
Doug Favell Sep 24, 2021 3:56PM ET
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10-15% drop in Q4 for starters
Chris Johnson
Chris Johnson Sep 24, 2021 1:49PM ET
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In a casino you don't care about fundamentals... It's just happy go lucky. Pick a number
Michael Miktus
Michael Miktus Sep 24, 2021 12:33PM ET
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You know the markets do not like uncertainty. The Fed gave us much more certainty about their future plans and that was more important than any adjustments to the magnitude and timing which were always seen as changeable anyway. As far as GDP growth, in this environment that is not possible to forecast accurately at all so I do not think anyone should be relying GDP forecast very much except loosely.
David Klepetko
klepid Sep 24, 2021 12:26PM ET
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yes stagflation is the right hearing. some part of the retail market ignore the fundament already for sometime so no surprise here. fed measures continue to have steadily weaker impact on the growth thus employment as well. hope the market will start burning surplus money in a needed healthy correction to the right value.
Jon Bal
Jon Bal Sep 24, 2021 12:23PM ET
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the markets didn't miss the memo JPOW said yesterday that he's gonna keep pumping a few $100 Bil.
Michael Miktus
Michael Miktus Sep 24, 2021 12:21PM ET
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Always remember. The markets like do not like uncertainty. The Fed gave them much more certainty about their future plans and that was more important than any adjustments to the magnitude.
Buncula Bunny
Buncula Bunny Sep 24, 2021 12:20PM ET
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It's funny how analysts expect the market to take a dump at the threat of a miniscule rate hike, especially given that it's been over 20 years since we last saw a rate above 6%.
MuraliKrishna Brahmandam
MuraliKrishna Brahmandam Sep 24, 2021 9:09AM ET
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Did I hear 'Stagflation'?
Yankee Steve
Yankee Steve Sep 24, 2021 9:03AM ET
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The market call the Fed bluff you didnt get the memo? The Fed can never taper. Period
David Smith
David Smith Sep 24, 2021 7:24AM ET
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Perhaps the market saw the weak jobs numbers the day after the press conference and interpreted them to mean the fed won't taper until much farther in the future than their projections. Or maybe the fed's stance on employment has switched to look at unfilled jobs as their primary metric (versus unemployment rate) and the market missed it in the message. Sometimes the market's first response is a knee jerk reaction and after they have some more time to digest, they adjust their thinking to align with reality.
Petet Larkar
Petet Larkar Sep 24, 2021 6:59AM ET
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not the mkt but you sure do.. you still keep missing in the boat!
Devaraj Krishnamoorthy
Devaraj Krishnamoorthy Sep 24, 2021 6:50AM ET
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Bull trap for retail investors
Mohd Izhar Muslim
Mohd Izhar Muslim Sep 24, 2021 5:57AM ET
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always be the best of the best
 
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