- The Fed will be forced to slow its pace of rate hikes as volatility increases, Charles Schwab said.
- Analysts have pointed to tensions in bond and currency markets stemming from the Fed’s aggressive hikes this year.
- That means the risks rise not just for a recession, but also for a financial crash, Schwab warned.
The Fed will be forced to slow its pace of rate hikes as it risks not only sending the economy into recession, but also causing a financial crash, analysts at Charles Schwab say.
The central bank issued three consecutive 75 basis point rate hikes this summer in response to rising inflation, which hit a 41-year high in June, with now expectations that the Fed will continue to tighten. until the key rate reaches 4.5% to 4.75%.
Markets are expecting another 75 basis point hike in November, but the central bank may soon be forced to slow its pace of tightening, Charles Schwab analysts said in a note on Friday, pointing to rising volatility stemming from increases issued so far.
“In recent weeks, the possibility of a more serious crash has emerged – the risk that aggressive Fed tightening will not only tip the United States into recession, but potentially destabilize the financial system in the process,” they said. analysts said.
The bank pointed to choppy waters in government bonds, whose volatility is currently measured at 153, according to Merrill Option Volatility Estimate. This is approaching levels seen in March 2020, when the Fed began injecting liquidity into the financial system to suppress markets during the pandemic.
The rise of the US dollar this year also increases volatility in markets outside the United States. Fed rate hikes have an outsized impact on the global economy, since most trade and debt is denominated in dollars.
Because a strong dollar makes imports cheaper, rate hikes effectively export inflation to other countries, analysts say.
Additionally, a rapidly rising dollar raises borrowing costs, especially in emerging markets, so servicing loans or debt with a depreciating currency increases the risk of default, Schwab warned.
“Volatility rose across a range of markets, from currencies to bonds, raising concerns about the ability of the global economy to weather sharply rising US interest rates,” the bank added. “While we don’t expect the Fed to stop raising rates, we believe market pressures may force it to slow the pace.”
- The Fed will be forced to slow its pace of rate hikes as volatility increases, Charles Schwab said.
- Analysts have pointed to tensions in bond and currency markets stemming from the Fed’s aggressive hikes this year.
- That means the risks rise not just for a recession, but also for a financial crash, Schwab warned.
The Fed will be forced to slow its pace of rate hikes as it risks not only sending the economy into recession, but also causing a financial crash, analysts at Charles Schwab say.
The central bank issued three consecutive 75 basis point rate hikes this summer in response to rising inflation, which hit a 41-year high in June, with now expectations that the Fed will continue to tighten. until the key rate reaches 4.5% to 4.75%.
Markets are expecting another 75 basis point hike in November, but the central bank may soon be forced to slow its pace of tightening, Charles Schwab analysts said in a note on Friday, pointing to rising volatility stemming from increases issued so far.
“In recent weeks, the possibility of a more serious crash has emerged – the risk that aggressive Fed tightening will not only tip the United States into recession, but potentially destabilize the financial system in the process,” they said. analysts said.
The bank pointed to choppy waters in government bonds, whose volatility is currently measured at 153, according to Merrill Option Volatility Estimate. This is approaching levels seen in March 2020, when the Fed began injecting liquidity into the financial system to suppress markets during the pandemic.
The rise of the US dollar this year also increases volatility in markets outside the United States. Fed rate hikes have an outsized impact on the global economy, since most trade and debt is denominated in dollars.
Because a strong dollar makes imports cheaper, rate hikes effectively export inflation to other countries, analysts say.
Additionally, a rapidly rising dollar raises borrowing costs, especially in emerging markets, so servicing loans or debt with a depreciating currency increases the risk of default, Schwab warned.
“Volatility rose across a range of markets, from currencies to bonds, raising concerns about the ability of the global economy to weather sharply rising US interest rates,” the bank added. “While we don’t expect the Fed to stop raising rates, we believe market pressures may force it to slow the pace.”