As The Fed Stresses, Financial Conditions Relax
We come back again this week to inflation and monetary policy, with the former still running at historically high levels and the latter – at least here at home and across most of the Western World – becoming tighter (and likely to become tighter still as we move through 2022). As we know, the Federal Reserve is tightening monetary policy with an eye toward making the cost of capital more expensive for companies and consumers in the hopes of slowing economic growth and bringing down inflation, without going so far as to put the US economy into recession. Our central bank first raised rates by 25 bps at its March meeting and has indicated it will raise rates by 50 bps at its May meeting, as well as begin running down its $9 trillion asset portfolio.
That rate increase in March, and increasingly hawkish talk by the Fed, has been felt across the fixed income world as the yield on the US 10 Year Note moved up by 80 bps since mid-March to a multi-year high of 2.92%. While the pain felt by investors in traditional fixed income and by anyone borrowing money based on a rate tied to the US 10 Year Note – think mortgages – is not to be dismissed or minimized, we would point out that as borrowing costs have moved higher the economy has continued to perform well, particularly those parts most levered to the ongoing reopening.
Measures of market stress, including high yield bond spreads and the broader, St. Louis Fed Financial Stress Index, have eased since the Fed raised rates in March. In fact, the Financial Stress Index, which
is designed to measure the degree of financial stress in the markets and is constructed from 18 weekly data series, including several interest rate series and yield spreads, hit an all-time low of negative 1.36% in late March (see chart; zero is viewed as representing normal financial market conditions; values above zero suggest above-average financial market stress and values below zero suggest below-average financial market stress). While the stock market has struggled year to date, we do think US equities will find their footing as investors become comfortable with a new monetary policy paradigm, and confident that the US economy remains on firm footing.
The views expressed are those of Brinker Capital and are not intended as investment advice or recommendation. For informational purposes only. Brinker Capital Investments, LLC, a registered investment advisor. 0693-BCI-4/25/2022