The Market Red Flags That Could Prompt the Fed to Slow Down on Rate Hikes
Setting aside a slowdown in inflation, strategists are looking for other potential market metrics that may cause the Fed to slow its aggressive cycle of rate hikes.
Other potential indicators include wider credit spreads, rising default risk, shrinking bond-market liquidity, and growing currency turmoil.
Here are some chart in more depth:
Over the past year, the credit spread has jumped about 70%, pushing up business borrowing costs. Much of the increase has come from higher inflation, shown as green flags above.
U.S. financial conditions have tightened to levels not seen since March 2020 due to higher borrowing costs and a drop in equity prices since the middle of August. The Fed closely watches financial conditions to gauge the effectiveness of its policy, according to Jerome Powell earlier this year.
A surge in the cost of protection against the risk of default on corporate debt is also a metric. On Tuesday, the spread on the Markit CDX North America Investment Grade Index, a benchmark of credit-default on a basket of investment-grade bonds increased by the biggest margin in a year.
The increasing risk of default is highly correlated with the surging dollar, while Fed interest-rate hikes are helping the dollar.
Another metric is shrinking Treasury liquidity. A Bloomberg index of liquidity for US sovereigns is nearing its lowest level since trading virtually ceased in early 2020 due to the onset of the pandemic.
Thin bond-market liquidity would put additional strain on the Fed's efforts to reduce its balance sheet, which grew to $9 trillion during the pandemic. The central bank is currently allowing $95 billion and mortgage bonds to fall off of the balance sheet, removing liquidity from the system.
A fourth metric may be the growing turmoil in the currency markets. The dollar has powered ahead this year, pushing the euro below parity for the first time in almost two decades.
The dollar's strength and excessive declines in the euro may cause concern about worsening global financial stability.
Source: Bloomberg
Disclaimer: Investing involves risk and the potential to lose principal. Past performance does not guarantee future results. This is for information and illustrative purposes only. It should not be relied on as advice or recommendation.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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steady Pom pipi : How come it's getting worse!![[undefined]](https://static.moomoo.com/nnq/emoji/static/image/default/default-black.png?imageMogr2/thumbnail/36x36 "undefined")
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Linda Swanson : Biden steps down!
jason xien : It will never slow down to preserve the value of the dollar, not American property.
Tiger Friends : Will be green today
Lana Su : Biden has made the lives of the American people like this. It's time for him to go home and retire.
71750344 : Fed hikes will hurt the economy because of the increasing result adding to inflation. Yes, the market will be affected and so will so many other spending avenues. Credit rates will go up and ALL financing rates will increase. Cash, which isn’t easy to maintain, will be the only way to save with our spending. Costs are out of control and so many companies are gouging us with high prices to try and recoup their losses during the pandemic lockdown. The ONLY positive rate increase affect is the rates we receive on our savings accounts. These rate increases is to slow down our spending so the government’s numbers will favor them in a better way. The less we spend, the more the chances are for layoffs or price increases for products and services.
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卫斯理传奇 : Vote Trump back in. American needs a businessman not a politician.