The central bank’s decision day highlighted the breakdown of correlations between stocks and bonds. That puts its dovish turn in a different light.
The Federal Reserve has finally found its way to the top of the monetary policy mountain. But the performance of bonds and stocks shows why policymakers’ dovish turn isn’t necessarily a good sign for investors.
Monetary policymakers raised the fed funds target range by 25 basis points on Wednesday to 4.75% to 5%, as expected, yet the key development was the introduction of new language in their statement that effectively opened the door to the end of the hiking cycle. Here’s how the statement from the Federal Open Market Committee changed from the previous meeting in February:
That new language helped bring Treasury yields sharply lower. In the past, such a move would have lit a fire under US stocks, but instead the S&P 500 Index fell 1.6%, with equity risk premiums rising higher on the day. All industry groups closed in the red, led by banks and real estate investment trusts. (Treasury Secretary Janet Yellen contributed to the selloff by saying regulators aren’t looking to provide blanket deposit insurance to stabilize the banking system.)
Full article: www.bloomberg.com/opinion/articles/2023-03-22/as-federal-reserve-nears-rate-peak-be-careful-what-you-wish-for#xj4y7vzkg