By Yasin Ebrahim
Investing.com – The S&P 500 closed at nearly one-month lows Friday as St. Louis Federal Reserve President James Bullard spooked the market after making a case for an earlier-than-expected rate to keep handle on inflation.
Bullard, a non-voting Fed member, said he expected the first rate hike by the end of the 2022, earlier than the Fed’s current projections, which indicate lift in 2023.
“I put us starting in late 2022,” Bullard said Friday during a TV interview on CNBC. “[M]y forecast said 3% inflation in 2021 — core PCE inflation — and 2.5% core PCE inflation in 2022.”.
“To me, that would meet our new framework where we said we’re going to allow inflation to run above target for some time, and from there we could bring inflation down to 2% over the subsequent horizon,” he added.
The Fed’s fingerprints – with a helping effort from fiscal stimulus – were all over the recent rally, and now that the central bank is looking to drain the well of stimulus, growth will slow — and risk markets are taking note.
“Investors are already grappling with the notion that the economy has been propped up markedly, thanks to monetary and fiscal support, but now market participants must accept the fact that the time has come to begin to remove – or at least talk about removing – the punch bowl, returning the economy to more organic means,” Stifel said in a note.
“[In] the absence of trillions in spending and record low rates, no matter how solid the fundamentals, the economy is poised to slow from a more robust profile at the start of the year looking out to 2022 and beyond.”
The week ahead promises to deliver yet more talk on tapering and inflation as several Fed members are slated to speak.
The hawkish talk from the Federal Reserve hasn’t spooked bond prices as yields, or rates, slipped.
The slip in rates took some by surprise, but it likely signals that the bond market is backing the Fed’s call that inflation will be transitory.
The move in bond yields is “more likely the bond market is buying into the Fed’s notion of inflation-dismissal rhetoric; the Fed has been clear it expects the recent bout of inflation to prove temporary, and as we move to the end of the year and into 2022, price pressures will expectedly ease,” Stifel added.
Tech, usually a fan of falling rates, failed to take advantage of the move lower, though it did outperform relative to other sectors.
Energy stocks, meanwhile, are set for a second-weekly loss, falling nearly 4% even as the oil prices remained firm.
In other news, Smith & Wesson Brands (NASDAQ:SWBI) jumped more than 17% after hiking its dividend by 60% and approving a $50 million stock buyback following better-than-expected quarterly results.
S&P 500 Closes Near 1-Month Low on Sooner Rate Liftoff Talk