The United States stock market isn’t yet fully stable and could potentially face further fluctuations as an outcome of the quantitative tightening performed by the Federal Reserve, according to financial strategists from the Bank of America.
In an analyst note earlier this week, it was recorded that the financial analysts and strategists directed by Savita Subramanian had cautioned that the shrinking of the Federal Reserve’s balance sheet might stimulate liquidity risks within different sectors of the stock market.
It was predicted by Bank of America that a base-case situation of a 2023 flat return would end in little movement from the S&P 500. We discover that the S&P 500 may conclude the year at place 4,000, which is only 0.9% higher from Monday’s close.
This warned of the instability of the market during 2023, and we find that in the event of a bear-case situation, the S&P benchmark index might drop from present levels down to 3,000, which is another 24%.
Subramanian predicted the S&P might end next year at 4,600 in the event of a bull market.
With the Fed reducing its approximately $8.6 trillion worth balance sheet at a rate of $95 billion per month, there is an “unprecedented leverage risk” in governments and central banks, causing liquidity risks to appear in “odd places.”
In June, the Federal Reserve started to unwind its balance sheet, which has introduced an under-mined and unknown tool to fight the greatest inflation in years. To keep borrowing cheap, the Federal Reserve bought mortgage-backed securities, as well as other Treasury securities during the pandemic, which nearly doubled the size of the balance sheet.
The portfolio runoff will jointly work with an array of combative interest rate increases to lower prices by tightening credit and decelerating growth, according to policymakers.
Additionally, the Federal Reserve has raised interest rates at six meetings in a row, including approving four 75-basis-point increases and tightening policy at the quickest rate since the 1980s. Despite a slight cooling in inflation last month, we find that the consumer price index has increased by 7.7% annually, which has been the slowest pace since January and officials have not indicated they will slow rate increases.
In an interview with reporters on Nov. 2, Fed Chairman Jerome Powell said that it’s too premature to be thinking about pausing our rate hikes and we have a long way to go. He also mentioned that when people hear lags, they think about pauses.
Some economists and lawmakers are concerned about the higher interest rate’s impact on the U.S. economy. Wall Street is of the opinion that the Fed’s war on inflation will provoke a recession.