The Federal Reserve’s plans for a prolonged period of elevated interest rates could continue pressuring stocks and bonds in coming months, though some investors doubt the central bank will stick to its guns. The U.S. central bank left interest rates unchanged on Wednesday, in line with market expectations. Broadly speaking, higher rates for longer could be an unwelcome turn of events for stocks and bonds.
FILE PHOTO: The U.S. Federal Reserve building is pictured in WashingtonNEW YORK - The Federal Reserve’s plans for a prolonged period of elevated interest rates could continue pressuring stocks and bonds in coming months, though some investors doubt the central bank will stick to its guns.
Elevated yields on Treasuries - seen as a risk-free alternative to equities because they are backed by the U.S. government - are also a headwind to stocks. The S&P 500 is up 15% year-to-date but has struggled to advance from late July’s high as the surge in yields accelerated. Still, it appeared that at least some part of the market was doubtful the Fed would stand firm on keeping rates as high as it projected - even though betting against the U.S. central bank’s hawkishness has mostly been a losing wager since policymakers began raising borrowing costs in March 2022.
Still, investors are contending with a series of near-term risks that have chipped away at the view of an economic “soft landing,” where the Fed is able to gradually ease inflation without causing a recession. John Madziyire, senior portfolio manager and head of U.S. Treasuries and TIPS at Vanguard Fixed Income Group, believes bond yields are near their peak and look “super attractive”.
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