Morgan Stanley: Fed sought to create easier financial conditions

Morgan Stanley analysis team suggest that in order to create easier financial conditions for businesses and the economy, the US Fed decided to pause its plans to keep hiking short-term rates as this was the message in its January meeting minutes.

Key Quotes

“It also decided to slow its effort to shrink its balance sheet by letting the proceeds from maturing bonds run off, a process known as quantitative tightening.”

“Here’s the counterintuitive part: While these are dovish monetary policy moves, which typically lead to lower interest rates, my analysis suggests they could lead instead to higher long-term rates.”

“That’s because investors will likely be quick to price in the potential that, thanks to the dovish policy, economic growth will improve and inflation rise. That could cause longer-term rates to drift higher, even as short-term rates stay low.”

“Since bond prices move inversely to interest rates, I don’t think this is a good time for investors to buy longer-term bonds. However, financial firms typically benefit from a steepening yield curve, making that potentially a sector worth adding to.”