Even with the market’s violent correction, a hawkish Federal Reserve is expected to signal it plans to raise interest rates and consider other tightening.
In this week's statement, Cabana said the Fed could indicate that its first rate hike since 2018 could be as soon as the next meeting, which would be March. It made a similar comment in 2015, in the statement a month ahead of its first rate hike following the financial crisis.dipped into correction territory Monday
Powell will brief the media as usual after the Fed releases its 2 p.m. ET statement. Powell's tone is also expected to sound hawkish. Once it ends that program, Fed officials are expected to begin to examine how they will shrink the balance sheet. The Fed currently replaces securities that are maturing with market purchases. It could change that operation, and make other moves, like altering the duration of securities it holds.
By moving on the balance sheet at the same time it is raising rates, the Fed would be quickening the pace of tightening. Swonk said every $500 billion on the balance sheet is worth 25 basis points of tightening."They talk about taking it down by $100 billion a month. They could easily go faster," she said.Cabana said he expects 70% to 80% of the sell-off in stocks is due to the Fed's move towards tighter policy.
Starting with the wind down of the first quantitative easing program after the financial crisis, he said there were eight instances between 2010 and 2018 all averaging an 11% decline