FOXBusiness: Long-term holding of high Fed rates may negatively affect the stock market

Source: FOXBusiness

Author: Megan Henney

Article: Original Article 

Publication date: Wednesday, December 14, 2022

It is expected that today the Federal Reserve System will increase the rate by 50 basis points after the two-day meeting. It’s a little less than a 75 basis point increase approved at the last four meetings.

Wall Street is even more focused on what officials' signals could be next in the fight against inflation. The Fed will release the first quarterly forecasts since September, giving an idea of where it thinks the US economy will be oriented in the next few years. It is expected that the forecast will show an aggressive way to raise the interest rates which will likely reduce economic growth and lead to unemployment. 

If the politicians make it clear that the rates will be high till 2024, it can severely hurt the markets which currently suppose that rates will be decreased in the second half of the year. Investors can be very disappointed.

However, the data released on Tuesday showed that in November, CPI grew only by 0.1% compared with the previous month and by 7.1% on a year-on-year basis. Inflation turned out to be much lower than economists expected. Nevertheless, inflation remains about three times the pre-pandemic average and well above the Fed's 2% target.

“We expect Fed Chair Powell will insist on the necessity to keep the policy on the restrictive level for some time for decreasing the inflation to 2% target”, said Gregory Daco, chief economist at EY-Parthenon. “This will be a negative for the current market prices. Powell will emphasize that history strongly warns against premature policy easing.”

Forecast: decrease of S&P after the Fed’s forecast about the rate