Plans for a prolonged period of elevated interest rates could continue pressuring stocks and bonds in coming months
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.
Fed Chair Jerome Powell said a “solid” economy would allow the central bank to keep additional pressure on financial conditions with much less of a cost to growth and the labor market than in previous U.S. inflation battles. “Inflation is going in the right direction, but … there’s a lot of headwinds” to growth, said David Norris, head of U.S. credit at TwentyFour Asset Management.
Of course, betting on a rate peak has backfired on investors several times in the past year, as stronger-than-expected economic growth forced markets to recalibrate views for a 2023 recession and push back expectations for how soon the central bank would cut borrowing costs.
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