Shares closed higher at walls street at the start of a busy week in which central banks are likely to unleash the last barrage of interest rate hikes of the year.
The S&P 500 rose 1.4%, the Dow Jones closed with gains of 1.6% and the nasdaq it gained 1.3 percent.
On Wednesday, markets expect the Federal Reserve to announce a more modest rate hike than it has been pushing for lately. Other central banks around the world are also expected to raise rates by half a percentage this week, including Europe‘s. Higher rates slow down the economy and risk triggering a recession if they rise too much, while dragging down investment prices.
The main reasons for Wall Street‘s difficulties for much of this year have been the high inflation and the higher interest rates designed to combat it. On Wednesday, markets expect the Federal Reserve announce its last rate hike of the year, following a blitz that began in March.
Higher rates slow down the economy by design and risk triggering a recession if they rise too much, while dragging down investment prices. One of the benefits for investors is that the Federal Reserve has hinted that it will reduce the size of its rate hikes, leading to expectations of a more modest hike in 0.50 points percentages on Wednesday.
This would happen to four consecutive mega-raises of 0.75 percentage points. They each tripled the Fed’s usual measure, and raised the central bank’s overnight interest rate to a range of 3.75% to 4%, after starting the year at near zero.
Other central banks around the world are also likely to raise their rates by half a percentage point this week, including the European Central Bank.
Any reduction in rate hikes would mean less added pain for markets and the economy. These hopes have contributed to the rise in stocks and bonds since mid-October, as investors have interpreted the data as a sign that the worst of inflation is finally over and would allow the Federal Reserve to relax.
But expectations of a slowdown in rate hikes may also be preparing some investors for a disappointment, if central banks signal this week that they will eventually raise rates more than the markets expect. Although they are not clearly a majority in the market, many traders are betting that the Federal Reserve’s overnight interest rate will peak at between 4.75% and 5% next year, for example.
The economists of Goldman Sachs They expect Federal Reserve policymakers to indicate on Wednesday that their average expectation is for rates to be in a range of 5% to 5.25%, up half a percentage point from their last projection.
Some investors are also continuing to make moves in anticipation of the Fed cut interest rates during the second half of 2023. Rate cuts often act like steroids for stocks and other investments, but the Fed has been insisting that it plans to keep rates high for some time to ensure it wins the battle against inflation.
Even if inflation is indeed declining, the global economy continues to face threats from already driven rate hikes. The real estate sector and other companies that depend on low interest rates have shown particular weakness, and concerns are growing about the strength of corporate earnings in general.
“Inflation data and the Fed are yesterday’s news; Pay Attention to Earnings Risk” was the headline of a report published Monday by Morgan Stanley strategists.
The next big milestone for the markets will come on Tuesday, when the US government releases the latest update to the inflation to consumption. Economists expect inflation to have slowed to 7.3% last month, from 7.7% in October. The data will come when the Federal Reserve begins its two-day meeting to decide what to do with interest rates.
In addition to raising short-term rates, the Fed is also making other moves with its vast bond investment fund which should effectively allow yields to rise over the longer term.
The yield on the 10-year Treasury note, which helps set interest rates on mortgages and other cheap loans, rose to 3.61% from 3.59% on Friday. The two-year yield, which tends to more closely track the Federal Reserve’s expectations, rose to 4.39% from 4.34 percent.
(With information from AP)
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