The stock Exchange is not out of the woods yet and could face further volatility next year due to the Federal Reserve’s quantitative tightening, according to Bank of America strategists.
In an analyst note this week, analysts led by Savita Subramanian warned that the Fed’s balance sheet reduction could fuel liquidity risks in different areas of the market.
Bank of America projected a base-case scenario of flat returns in 2023, with the S&P 500 ending the year at 4,000, up just 0.9% from Monday’s close.
But he warned of major market volatility throughout the year and said that in a so-called bearish scenario, the S&P benchmark could fall another 24% from current levels at 3,000.
In the event of a bull market, Subramanian estimated that the S&P could end the year at 4,600.
The uncertainty stems from “unprecedented leverage risk” by governments and central banks, which could lead to liquidity risks in “strange places” as the Federal Reserve shrinks its balance sheet from about $8.6 trillion to a rate of 95 billion dollars per month.
The The Fed has started to relax its balance sheet in June, deploying one of its lesser-known tools to fight the strongest inflation in decades. The balance sheet, which consists mostly of bonds and other assets it has purchased, nearly doubled in size during the pandemic as the Fed purchased mortgage-backed securities and other Treasuries in order to continue to borrow cheaply.
Policymakers say the portfolio sell-off will work in tandem with a series of aggressive interest rate hikes to depress prices by slowing growth and tightening credit.
The Fed has also voted to raise interest rates in six consecutive meetings, including approving four 75 basis point rate hikes, as it tightens policy at the fastest pace since the 1980s. inflation eased slightly last month – the consumer price index rose 7.7% a year, the slowest pace since January – authorities showed no signs of a slowdown in rate hikes .
“Let me say this,” Fed Chairman Jerome Powell told reporters Nov. 2. .”
Economists and some legislators are increasingly concerned about the impact of rising interest rates on the the american economy, and there is a broad consensus on Wall Street that the Fed will trigger a recession with its war on inflation.
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