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‘Better Off With Bigger Bolder Moves:’ Traders Reacts to the Fed Rate Hike

·5 min read
‘Better Off With Bigger Bolder Moves:’ Traders Reacts to the Fed Rate Hike

(Bloomberg) -- After a wild five days that saw stocks tumble into a bear market and Treasury yields spike to levels not seen since the financial crisis, the Federal Reserve delivered a largely expected rate hike of 75 basis points -- the biggest since 1994.

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Treasuries rallied as the central bank committed to battling inflation even at the risk of pushing the roaring economy into a recession. And stocks rose sharply after Chair Jerome Powell spoke.

“I do not expect moves of this size to be common,” he said at the news conference following the decision. “Either a 50 basis point or a 75 basis-point increase seems most likely at our next meeting.”

Here’s what traders were saying as the rate hike and comments sank in:

Seema Shah, chief global strategist at Principal Global Investors:

“There was an outsize fear about a 100 bps hike, while the 75 bps was fully priced in. So today’s decision doesn’t deliver a negative surprise -- that happened on Monday,” she said. “Once the data starts to roll over with greater speed, renewed equity market declines are likely while credit markets are almost certain to face greater pain. Whichever you look at it, it’s equity market pain today or pain tomorrow.”

Tim Courtney, chief investment officer at Exencial Wealth Advisors:

“The market hasn’t been liking what the Fed has been doing. There’s an argument to be made to just go even higher. Maybe we were even thinking what it would be like if they increase it by 1%,” he said. “It almost seems that we are better off with bigger bolder moves rather than having this dribble out through time.”

Michael Arone, chief investment strategist at State Street Global Advisors’ U.S. SPDR business:

“Not that long ago Powell suggested 75 basis points is off the table. Yet here we are. He will suggest the data has changed that’s why he had to adjust. That’s fine. But I do think that undermines the Fed’s credibility moving forward,” he said. “Now, investors need to question the reliability of that forecast and how much he will veer away from it.”

Dennis DeBusschere, the founder of 22V Research:

“We need to stop confusing ‘dovish’ with what got priced because of leaks before the meeting. A bounce because things got priced is not dovish. Just oversold conditions adjusting.”

Cliff Hodge, chief investment officer at Cornerstone Wealth:

“It’s clear the Fed is focused on crushing inflation at the expense of a soft landing.”

Frances Donald, global chief economist and global head of macro strategy at Manulife Asset Management:

“The crux of today is that the Fed is catching up to market thoughts: front-loaded hiking leading to a rise in unemployment, followed by cuts in 2024. The Fed is happy to hike into weakness -- which risks recession -- and will subsequently cut rates. The Fed’s outlook is gentler and smoother than what is likely to happen as the 0.4 increase in the unemployment rate is likely too complacent about the risks to the other side of the Fed’s mandate. We expect the easing cycle to be needed and enacted in 2023, not 2024.”

Tim Holland, chief investment officer at Orion Advisor Solutions:

“The market will take great comfort in the Fed affirming – through word and action – its inflation-fighting credentials. We also think the market will find the Fed’s lowering of its expectations for the economy this year as quite credible and appropriate. Those are all positives, in our opinion. The risk with a 75bps move in June, and the possibility of another one at the July meeting, is the Fed does indeed go too far, too fast, putting the economy at risk of recession.”

Eric Theoret, global macro strategist at Manulife Investment Management:

“The idea that the Fed is embarking on a series of 75 basis point hikes is much more painful for markets than a 75 one-and-done followed by a series of 50 basis point hikes and perhaps even moderation thereafter,” he said. “The idea that this is the only 75 basis point hike is a relief for markets fearing that there could be more.”

David Rosenberg, chief economist and strategist at Rosenberg Research & Associates Inc.:

“The Fed expects this to generate enough slack to bring inflation down materially next year. And the shift in the view of the labor market with a rising unemployment rate to over 4% is an implicit call for a recession.”

Michael Shaoul, chief executive officer of Marketfield Asset Management:

“That there was no mention of the lousy equity and credit market performance in the statement is also revealing, since far more modest declines have often been followed by some soothing language since the Financial Crisis. This is now an ‘Inflation First’ Committee, with Unemployment arguably the junior mandate going forwards and financial markets left to tend for themselves.”

Michael Matousek, head trader at US Global Investors:

“Investors will change their strategy so that instead of buying momentum, they seek out beaten-up stocks and try to manage risk. We have lost the tailwind from the Fed, but higher rates are a necessary evil to regulate inflation. Of course the difficult thing is that the only way to lower inflation is slow down the economy, and we know investors are likely to sell risk assets ahead of a slowdown.”

Fiona Cincotta, senior financial markets analyst at City Index, wrote in a note.

“The fact that US indices are holding on to gains, the US dollar is marginally stronger, and we haven’t seen a massive market reaction, I think what that’s telling us is there’s a good chance we are seeing the floor in US indices. I don’t think the indices will be falling much lower.”

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