The United States Federal Reserve began its most aggressive quantitative tightening efforts in March 2022, raising benchmark interest rates in the year since from near-zero to 4.75% to 5% annually. While the central bank has successfully brought down inflation to some degree, the increasing interest rates are starting to cause cracks in the global banking industry.
The market expects the Fed to end quantitative tightening and provide favorable liquidity conditions to avoid a global financial crisis as the banks begin to fail. The shift in the Fed’s policy should have significant implications for financial assets.
Jurrien Timmer, the director of global macro at Fidelity, discussed the likely impact of the Fed’s dovish pivot on stocks, gold and Bitcoin.
Market expects the Fed to put an end to interest rate hikes
The Fed is largely expected to either maintain the interest rates at current levels or start cutting rates. CME’s FedWatch Tool shows that the market is currently placing a 50% chance that the March 25 basis point hike was the last one for a while.
CME FedWatch Tool as of March 30. Source: CMEIf the Fed stops its rate hikes, risk assets like equities can experience a positive rally based on historical data. The average one-year return in the S&P 500 index after the last rate hike since 1984 has been 18.9%.