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Powell says the Fed still has “a ways to go” after a half point hike



(Bloomberg) — The Federal Reserve is not close to ending its anti-inflationary campaign to raise interest rates, Chairman Jerome Powell said, as officials indicated borrowing costs will trend higher than investors expect next year.

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“We still have some way to go,” he said at a news conference Wednesday in Washington after the FOMC raised its benchmark rate by 50 basis points to the 4.25% to 4.5% target range. Policymakers expected rates to end next year at 5.1%, according to their median forecast, before falling to 4.1% in 2024 – higher than previously indicated.

Powell said the size of the rate increase delivered on Feb. 1 at the next Fed meeting would depend on the data coming in — leaving the door open for another half-percentage-point move or stepping down to a quarter of a point — and lunged back. He bets that the Fed will reverse course next year.

“I wouldn’t see us considering cutting rates until the committee is confident that inflation is coming down to 2% in a sustainable way,” he said. “Restoring price stability will likely require maintaining a restrained political stance for some time,” he said.

Treasury yields are up, the S&P 500 is down and the dollar index trimmed losses on the day as Powell spoke.

“The Committee expects that continued increases in the target range will be appropriate in order to achieve a monetary policy stance that is sufficiently restrictive to return inflation to 2% over time,” the FOMC said in its statement, repeating language it used in previous communications.

Investors had speculated that the Fed would soon halt its increases after easing financial conditions. As of Wednesday, stocks were up, while mortgage rates and the dollar had fallen since Powell signaled last month that a policy shift was coming. They were also betting that rates would come in around 4.8% in May, followed by cuts totaling 50 basis points in the second half of the year.

Click here for Bloomberg’s TOPLive blog about the Fed’s decision and press conference

The vote was unanimous.

“It is our judgment today that we are not in a sufficiently constrained political position yet,” the Fed chair said. “We will continue the course until the job is done.”

Powell had previously signaled plans to taper higher, emphasizing that the pace of narrowing is less important than the peak and duration of prices at a high.

The decision follows four consecutive 75 basis point increases that boosted interest rates at the fastest pace since Paul Volcker led the central bank in the 1980s.

Increases in consumer prices are beginning to slow more markedly from their 40-year highs earlier this year. But a growing cadre of economists expect aggressive Fed action to tip the US into recession next year.

Such concerns drew criticism from lawmakers, with Democratic senators Elizabeth Warren, Bernie Sanders and Sheldon Whitehouse warning that raising interest rates could “slow the economy to a crawl.”

Officials have given a clearer signal that they expect higher rates to affect the economy. They cut their growth forecast for 2023, seeing an expansion of 0.5%, according to the median forecast released Wednesday. They raised their GDP estimate for 2022 slightly, to 0.5%. Central bankers increased their forecast for the unemployment rate next year to 4.6% from 3.7% in November.

The distribution of price expectations also skewed upward, with seven out of 19 officials seeing rates above 5.25% next year.

Federal Reserve officials raised their estimates for the headline, core readings of their preferred measure of inflation, the personal consumption expenditures index. They now see personal consumption expenditures coming in at 3.1% in 2023 compared to the September estimate of 2.8%, while the base level – which excludes food and energy – could be 3.5% for next year.

Wednesday’s move capped a challenging year for the US central bank which was initially slow to start tightening policy in response to mounting price pressures.

Since raising interest rates from near zero in March, the Fed has moved aggressively to catch up, maintaining hope that it can deliver a soft landing that avoids a dramatic rise in unemployment.

Officials are seeking to slow growth below its long-term trend to cool the labor market – with jobs still well above the number of Americans out of work – and reduce pressure on prices well above their 2% target.

Policymakers received some good news on Tuesday when government data showed consumer prices rose 7.1% in the year ending in November, the lowest rate this year.

However, Powell has said repeatedly that he is willing to see the economy take some pains to bring down inflation and avoid the mistakes of the 1970s when the Fed prematurely eased monetary policy.

– With assistance from Chris Middleton, Sophie Caronello, Liz Capo McCormick, Molly Smith, Jonelle Marty, Matthew Bossler and Craig Torres.

(Updates with Powell’s comment about not cutting interest rates soon in the fourth paragraph.)

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Stock, bond and cryptocurrency investors remain on edge after a rough year for the markets




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Dow Jones losses are heading towards the closing bell as US stocks approach their worst year since 2008




US stocks were trimming losses heading towards the closing bell on Friday, but were still on track to post their worst annual loss since 2008, as the harvest of tax losses combined with concern over the outlook for US corporate and consumer earnings took its toll.

How are stock indices traded?
  • Dow Jones Industrial Average

    It fell about 182 points, or 0.6%, to 33,039 points.

  • S&P 500 index

    It fell nearly 26 points, or 0.7%, to about 3,824.

  • The Nasdaq Composite Index fell 72 points, or 0.7%, to about 10,406 points.

Stocks posted their biggest gains of the month on Thursday, with the Dow Jones rising 345 points, or 1.05%, to 33,221 as major stock indexes rebounded after losses incurred earlier in the week that pushed the Nasdaq Composite to a new closing low for the year. . The S&P 500 was on track on Friday to wrap up its fourth consecutive losing week, the longest streak of weekly losses since May, according to FactSet data.

What drives the markets

US stocks traded lower on Friday afternoon, on pace to close the last trading session of 2022 with weekly and monthly losses.

Stocks and bonds have been crushed this year as the Federal Reserve raised its benchmark interest rate more aggressively than many expected, as it sought to crush the worst inflation in four decades. The S&P 500 is on track to end the year with a loss of nearly 20%, its worst annual performance since 2008.

“Investors were on edge,” Mark Heppenstahl, chief investment officer at Penn Mutual Asset Management, said in a phone interview Friday. “It seems as if being able to bring prices down might be a little easier given how bad the year has been.”

Stock indices have fallen in recent weeks as the recent rally inspired by hopes in the Fed’s policy focus faded in December after the central bank indicated it would likely wait until 2024 to cut interest rates.

On the last day of the trading year, the markets were also hit by selling to capture losses that could be written off from tax bills, a practice known as tax harvesting, according to Kim Forrest, chief investment officer at Bouquet Capital Partners. .

Forrest added that an uncertain outlook for 2023 has also weighed in, as investors worry about the strength of corporate earnings, the US economy and consumer as the fourth-quarter earnings season approaches early next year.

“I think the Fed, and then earnings in mid-January — they’ll set the tone for the next six months. Until then, it’s anyone’s guess.”

The US central bank has raised its benchmark interest rate by more than four percentage points since the start of the year, pushing borrowing costs to their highest levels since 2007.

The timing of the first Fed rate cut will likely have a significant impact on markets, according to Forrest, but the outlook remains uncertain, even as the Fed tries to signal that it plans to keep interest rates higher for longer.

On the economic data front, the Chicago PMI for December, the latest major data release for the year, Came stronger than expected. Climbing to 44.9 from 37.2 in the previous month. Readings below 50 indicate contraction.

In the coming year, Heppenstahl said, “we are likely to shift toward concerns about economic growth rather than inflation.” “I think the decline in growth will eventually lead to an even greater drop in inflation.”

Read: Stock market investors face 3 recession scenarios in 2023

Eric Sterner, chief information officer at Apollon Wealth Management, said in a phone interview on Friday that he expects the US to fall into a recession next year and that the stock market could see a new bottom as companies likely review their earnings. “I think the earnings outlook for 2023 is still very high,” he said.

The Dow Jones Industrial Average, S&P 500 and Nasdaq Composite were all on pace Friday afternoon posting weekly losses of around 1%, according to FactSet data, at last check. For the month, the Dow was down about 5%, the S&P 500 was down about 7% and the Nasdaq was about to crash down about 10%.

Read: Value stocks are outperforming growth stocks in 2022 by a large margin historically

As for bonds, Treasury yields rose on Friday as the US sovereign debt market was set to post its worst year since at least the 1970s.

The yield on the 10-year Treasury note

It rose about four basis points on Friday at 3.88%, according to FactSet data, in the latest check. Ten-year yields jumped about 2.34 percentage points this year through Thursday, on track for the biggest annual gain ever based on data going back to 1977, according to market data from Dow Jones.

Meanwhile, the yield on the two-year note

Up about 3.64 percentage points in 2022 through Thursday to 4.368%, 30-year return

It jumped 2.03 percentage points over the same period to 3.922%. That marks the largest increase in a calendar year for each based on data going back to 1973, according to market data from Dow Jones.

Outside the US, European stocks capped their biggest percentage drop in a calendar year since 2018, with the Stoxx Europe 600
And the
It is an index of euro-denominated stocks, down 12.9%, according to market data from Dow Jones.

Read: A downturn in the US stock market is trailing these international ETFs as 2022 draws to a close

Companies in focus

Steve Goldstein contributed to this article.

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Fed’s reverse repo facility reaches $2.554 trillion by Reuters




© Reuters. FILE PHOTO: The Federal Reserve Building in Washington, US, January 26, 2022. (Reuters)/Joshua Roberts/File Photo

Written by Michael S Derby

NEW YORK (Reuters) – A key facility used by the Federal Reserve to help control short-term interest rates saw record inflows on Friday, the last trading day of the year.

The New York Fed said its reverse repo facility took in $2.554 trillion in cash from money market funds and other eligible financial firms, beating the previous high seen on Sept. 30, when inflows totaled $2.426 trillion.

The cash rally was almost certainly tipping into record territory in the usual end-of-quarter pattern that could worsen further towards the end of the year. On those dates, for a variety of reasons, many financial firms prefer to deposit money in the central bank rather than in the private markets.

The Fed’s reverse repo facility has been very active for some time. After seeing almost no absorption for a long time, money began to gravitate toward the central bank in the spring of 2021 and then grew steadily. Daily reverse repo usage has been steadily above the $2 trillion mark since June.

The reverse repo facility takes cash from qualified financial firms in what is an actual loan from the Federal Reserve. The current rate is 4.3%, a yield that is often better than rates for short-term private sector lending.

The reverse repo facility is designed to provide a soft floor for short-term rates and the federal funds target rate, and is the Fed’s primary tool for achieving its function and inflationary mandates. To mark the higher end of the range, the Fed is also pushing deposit-taking banks to deposit cash at the central bank, where the interest rate on reserve balances is now 4.4%.

The federal funds rate is currently set between 4.25% and 4.5% and is trading at 4.33% as of Friday, sandwiched between the reverse repo rate and interest on reserve balances.

There are no signs of shrinkage

Even with the heavy use of reverse repo, Fed officials have always remained unconcerned about large outflows, even as some in financial markets worried about the potential for the Fed to drain the borrowing and lending lives of private money markets.

Fed officials also expected that as the central bank continues to raise interest rates with the goal of bringing down very high levels of inflation, the use of the reverse repo facility should decrease. But that hasn’t happened yet, and some in the markets now believe that the consistently high utilization of the Fed facility will be around for some time to come.

Research by the Federal Reserve Bank of New York indicated that banking regulation issues make demand for the Fed’s reverse repo instrument high. Meanwhile, the Kansas City Fed added its view that large inflows are related to limited private market investment opportunities and policy uncertainty.

Strong cash flows to the central bank may not have alarmed central banks, but they have driven their operations to an actual loss. The Federal Reserve finances itself through interest on the bonds it owns as well as the services it provides to the financial community. It usually makes a noticeable profit and by law returns it to the treasury.

Currently, the cost of paying interest on reverse repo agreements and reserve balances outweighs income. The Fed reported Thursday that as of Dec. 28, the accounting metric it uses to track losses was $18 billion. Many observers expect that the Fed’s plans to raise interest rates further and keep them at high levels will mean fairly large losses for the central bank over time, even if these losses will not affect the action of the Fed’s monetary policy.

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