In the near future, the US Federal Reserve will reduce its purchases of support in the market.
At 20:00 Norwegian time, the interest rate decision came from the Federal Reserve, the US Federal Reserve. As expected, the central bank kept the key interest rate unchanged. The tension was linked to what the central bank says about subsidizing stock purchases, an important crisis measure during the pandemic.
The Federal Reserve, led by Central Bank Governor Jerome Powell, says the US economy is booming. Thus, purchases of support in the market may be reduced in the near future, but the central bank will not be more specific than that.
Before the statement became known, the US S&P 500 stock index was up just under 1 percent. The most important interest rate in the world, the ten-year US government bond yield, was 1.32 percent, while in the foreign exchange market, one had to come out with just over $1.17 for one euro.
At 20.21, the ten-year interest rate fell marginally to 1.307 percent, but rose to nearly 1.33 percent by 9pm. The dollar was slightly lower against the euro, while the S&P 500 rose 1.32%.
The Federal Reserve wrote in a press release that the interest rate committee will increase holdings of government securities to at least $80 billion per month and mortgage-backed securities to at least $40 billion.
This was due to happen until the labor market was back in full swing and inflation rose in line with the long-term stability target of just over 2 percent. The US economy has moved toward these goals, which means a downsizing may be underway soon.
Support purchases help stabilize fixed income markets and ensure affordable credit for households and businesses.
During the Corona pandemic, the Federal Reserve bought huge amounts of bonds to keep interest rates low. The big question that could cause tremors in the financial markets is: What will the central bank say tonight about reducing the volume of these purchases?
Yes, the most important signal is whether Powell has a concrete plan to downsize. This applies to both the time the downsizing starts and the actual downsizing profile.
“We believe the downsizing will start in November or December,” Chief Economist Kjersti Haugland at DNB Markets told Nettavisen Okonomi before the statement became known.
Signals today can affect the Norwegian market. If the US stock market falls, the decline will likely spread to other exchanges. If long-term interest rates rise in the US, this could lead to higher interest rates in Norway. This in turn can lead to more expensive fixed rate loans. On Wednesday evening, the market results were small.
In principle, lower interest rates are good for the stock market, because the requirements for returns are reduced. But in the past 20 years, there has been no clear correlation between the fixed income market and the stock market.
Interest rates tend to have an effect on the stock market, especially growth rates, but downsizing does not necessarily mean a stock market downturn. Markets, for example, could interpret the message as an indication of the central bank’s faith in the US economy.
It is more about the mood and other topics in the market that can negatively affect the stock markets. Hoagland admits that it is not decided which direction it will be. Growth stakes are stocks whose profits are expected to come in the coming years,
The DNB expected the Fed to reduce its purchases by $15 billion per month and end its support purchases after the summer. In this case, it means not buying the stock as of next fall. The central bank is not specific, it did not say any amount.
Our forecasts are in line with consensus among analysts, but the uncertainty about when and contours of the downsizing is too great, Hoagland acknowledged Wednesday afternoon.
Three factors in the US economy were central to the central bank’s assessments. The US labor market in August was weaker than expected, indicating continued significant support buying. There was also a sharp rise in deaths as a result of the delta variable.
High price increase
This leaves us uncertain whether the Fed will be on the more cautious side. On the other hand, inflation is much higher than they thought. The question is whether enough improvement has been made in the labor market, says DNB’s chief economist. The answer to that is not entirely, but it is elusive.
One possibility is to present a more cautious picture of downsizing, Hoagland said, as the central bank starts at $10 billion a month.
Powell may also choose to delay announcing the downsizing in light of the economic situation, which in practice has happened.
Handelsbanken Capital Markets wrote in its morning report on Wednesday that it is heading for two US rate hikes through 2023. But there is also a surprisingly high number in the US Interest Rate Committee that expects a rate hike already in 2022.
The market envisions a gradual rise in US interest rates in the next few years and up to four increases by the end of 2024. There are two smaller increases than expected here at home.
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