Markets are rattled by investor anxiety over rate increases as Fed meets

WASHINGTON (AP), -- The stock market's wild volatility this week has raised questions about Wednesday's Federal Reserve meeting. It is unclear if the Fed will make clear how fast it plans on tightening credit and slowing the economy.

26 January 2022 Wednesday 13:02
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Markets are rattled by investor anxiety over rate increases as Fed meets

The Fed will signal in March that it will increase its benchmark short-term rate. This is a drastic change from its ultra-low-rate policies during the recession. The Fed plans to stop buying monthly bonds in March, further tightening credit. It may also reduce its massive stock of Treasury and mortgage bonds later in the year.

Investors are concerned that there could be more. Wall Street is concerned that the Fed could signal a half-point increase to its key rate on Wednesday. A concern is that Fed Chair Jerome Powell, who will be speaking at a news conference on Wednesday, could suggest that the central banking might raise rates more often this year than the four increases most economists anticipate.

The Fed's bond holdings are another wildcard, especially for Wall Street. These holdings grew by $120 million per month as recently as September. The Fed created money to finance the bond purchases. They were designed to lower longer-term rates and encourage borrowing and spending. Many investors saw bond buying as a way to boost stock market gains and inject cash into the financial sector.

Minutes of the Fed's December meeting showed that the central bank was contemplating reducing its bond holdings and not replacing mature bonds -- an aggressive move that is more than simply ending purchases. Analysts believe that the Fed may begin to shrink its holdings as soon as July, which is much earlier than what was anticipated a few months back.

It is not known what the Fed's reduction in its bond stockpile will do to its financial position. The Fed has not raised rates or reduced its balance sheet since 2018, the year that the Fed last did both. In three months, the S&P 500 stock index fell 20%.

WASHINGTON (AP), -- The stock market's wild volatility this week has raised questions about Wednesday's Federal Reserve meeting. It is unclear if the Fed will make clear how fast it plans on tightening credit and slowing the economy.

The Fed will signal in March that it will increase its benchmark short-term rate. This is a drastic change from the ultra-low rates it used during the recession. The Fed plans to stop buying monthly bonds in March, further tightening credit. It may also reduce its massive stock of Treasury and mortgage bonds later in the year.

Investors are concerned that there could be more. Wall Street is concerned that the Fed could signal a half-point increase to its key rate on Wednesday. A concern is that Fed Chair Jerome Powell, who will be speaking at a news conference on Wednesday, could suggest that the central banking might raise rates more often this year than the four increases most economists anticipate.

The Fed's bond holdings are another wildcard, especially for Wall Street. These holdings grew by $120 million per month as recently as September. The Fed created money to finance the bond purchases. They were designed to lower longer-term rates and encourage borrowing and spending. Many investors saw bond buying as a way to boost stock market gains and inject cash into the financial sector.

Minutes of the Fed's December meeting showed that the central bank was contemplating reducing its bond holdings and not replacing mature bonds -- an aggressive move that is more than simply ending purchases. Analysts believe that the Fed may begin to shrink its holdings as soon as July, which is much earlier than what was anticipated a few months back.

It is not known what the Fed's reduction in its bond stockpile will do to the economy. The Fed has not raised rates or reduced its balance sheet since 2018, the year that the Fed last did both. In three months, the S&P 500 stock index fell 20%.

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