Daily Brief: The Fed Resorts To Ditching Bonds In Case Rate Hikes Don’t Pan Out

Daily Brief: The Fed Resorts To Ditching Bonds In Case Rate Hikes Don’t Pan Out

almost 2 years ago3 mins

Mentioned in story

The Federal Reserve (the Fed) revealed this week that it’s planning to sell off billions of dollars of bonds – just in case interest rate hikes aren’t up to the job.

What does this mean?

The Fed has two main ways of fighting inflation: it can raise interest rates, or it can sell off some of the $9 trillion worth of bonds it’s accumulated – a move that drives down their prices, pushes up their yields, and increases the overall cost of borrowing. The central bank already started doing the first of the two last month, but now it’s resorting to the latter: the central bank said it could ramp up to selling $95 billion worth of bonds every month – almost twice as much as when it did the same thing in 2017. It suggested it’d be more aggressive with rate hikes too, which analysts took to mean we can expect at least two 0.5% hikes – rather than the typical 0.25% – sometime this year.

Fed plans

Why should I care?

For you personally: You have been warned.

The tech-heavy Nasdaq index fell on the news, and the message was loud and clear: tech stocks are at risk. See, investors value a stock based on what they think a company’s future profit is worth today. And since tech companies are expected to generate a higher proportion of their profits in the future than other companies, they’re the first to suffer when yields rise. Then again, you might just want to ride it out: data shows that fast-growing stocks like tech have beaten cheap-looking value stocks in three of the last four periods of Fed rate hikes.

Growth stocks

The bigger picture: The R word.

It’s no secret that the Fed’s efforts to limit inflation will drag on economic growth, but some economists are more pessimistic than others. Take Deutsche Bank: it said this week that it’s expecting the US economy to fall into recession next year.

Keep reading for our next story...

JetBlue Made An Offer For Spirit Airlines

JetBlue image

US carrier JetBlue made a $3.6 billion offer to buy Spirit Airlines this week, in hopes its head can be turned from another eligible admirer.

What does this mean?

Domestic travel has bounced back from the pandemic much more quickly than long-haul flights, and Spirit – which specializes in cheap, largely US-based travel – has been reaping the rewards of that shift in momentum. That caught the eye of Frontier Group, which offered to buy the airline for $2.9 billion in February – a bid Spirit was happy to accept.

But a deal’s not done till it’s done, and JetBlue’s now swooped in with a $3.6 billion offer of its own. If Spirit decides to take it, the deal would make JetBlue the fifth-biggest airline in the US, and could allow it to offer more flights in more parts of the country. It’ll shore up the airline’s bottom line too: JetBlue reckons the sales boost and cost savings combined could be worth about $700 million a year.

Stock prices
Source: The Wall Street Journal

Why should I care?

Zooming in: No cheaper tickets for you.

Fuel costs are putting a lot of pressure on airlines at the moment, but a bigger carrier should have the financial flexibility to better absorb those costs and offer cheaper tickets anyway. Trouble is, ticket prices haven’t tended to drop following mergers in the industry, but instead risen toward those of the more expensive carrier. And since that would undermine Spirit’s whole “budget airline” schtick, analysts think regulators might end up stepping in.

Fuel prices
Source: IATA

The bigger picture: Little old JetBlue.

That wouldn’t be JetBlue's first regulation rodeo: it’s already dealing with a lawsuit after teaming up with American Airlines to coordinate flight times in the north-east of the US. Regulators say that it’s hurting customers by dint of fewer choices of flights, but JetBlue is arguing the opposite: that the move helps it better compete with the biggest airlines, who are otherwise blocking it out of the region.

Finimize

BECOME A SMARTER INVESTOR

All the daily investing news and insights you need in one subscription.

Disclaimer: These articles are provided for information purposes only. Occasionally, an opinion about whether to buy or sell a specific investment may be provided. The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment advisor.

/3 Your free quarterly content is about to expire. Uncover the biggest trends and opportunities. Subscribe now for 50%. Cancel anytime.

Finimize
© Finimize Ltd. 2023. 10328011. 280 Bishopsgate, London, EC2M 4AG