Investors Believe Federal Reserve Will Continue Hikes Despite Interest-Rate Swap Market

Investors are becoming more bearish on stocks after the Federal Reserve meeting on Wednesday, according to an Instant MLIV Pulse survey. 

Approximately 350 respondents shared their outlook on the Fed’s monetary policy. Most were convinced that the central bank would continue to hike interest rates throughout the year and won’t pivot towards monetary easing until 2024. 

The findings contradict interest-rate swap markets, which remain eager to price in cuts this year. The survey shows that investors have become more pessimistic about the outlook for equities due to the Fed’s decisions and statements.

Investors Believe Fed is Not Done Tightening Policy

Over 70% of the MLIV Pulse survey respondents believe the Federal Reserve isn’t done with tightening policy yet. More than half expect the central bank to wait until next year for monetary easing.

The survey results align with Fed officials’ views and contradict traders who increased bets on rate cuts for this year. Some increased their bets even after Wednesday’s hike and Fed Chair Jerome Powell’s subsequent comments.

Fed Officials and Survey Respondents Wary of Inflation

The survey results show that respondents are wary of inflation, with 39% stating that it remains the biggest danger. In his press conference, Fed Chair Jerome Powell echoed this sentiment, stating that “rate cuts are not in our base case.” 

The swaps markets were pricing the Fed’s benchmark to peak around 4.95% in May, then falling to about 4.2% in December. That is a different trajectory from the one outlined by Powell and depicted in the Fed’s projections.

Stocks Swoon as Investors React to Fed’s Announcements

The Fed’s announcements and comments from Treasury Secretary Janet Yellen caused stocks to drop during the US afternoon. After Yellen’s comments, the S&P 500 index closed down 1.7%, with global bank stocks and US financials potentially coming under further pressure. 

Against trading trends in the post-Fed hours, some 53% of the MLIV Pulse survey respondents said they expected a flatter yield curve due to Wednesday’s central-bank decision.

Conclusion

Due to Wednesday’s central-bank decision, investors are wary of inflation and expect a flatter yield curve. The Fed’s announcements and comments from Treasury Secretary Janet Yellen caused stocks to drop during the US afternoon. 

Furthermore, global bank stocks and US financials will potentially come under further pressure.

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