Volatility in the stock market could be coming back from the Fed

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Volatility in the stock market could be coming back from the Fed

Market volatility has dipped since September, but the nation s top bankers are warning that choppiness could be coming back soon - thanks to the Federal Reserve.

In earnings calls this week, executives at the largest U.S. banks said price swings could be back as the central bank attempts to reverse and then slow its easy money policies launched last year to insulate the economy from the effects of the COVID 19 pandemic.

It's good to be watchful right now, Morgan Stanley MS CEO James Gorman told analysts on Thursday. There's no thing to suggest there are any issues but markets are bouncing a little bit. We'll see more of this in the next 18 months as the Fed starts to move. The VIX, a key measure of market volatility, has drifted below the 2020 levels as the Fed gradually communicated its intention to begin stopping its so-called quantitative easing program as soon as next month. Once the Fed kicks off this process, it will reduce its $120 billion-a - month pace of U.S. Treasury and agency mortgage-backed securities purchases. Will the Fed initiate a second interest rate hike in 2022?

Mark Mason told reporters Thursday morning that the Fed s pullback could be good for volatility in the stock market.

All these factors play into investor positioning, Mason said. As investors look to position based on volatility, that creates an opportunity for us to make markets for them. Through the pandemic-ridden quarters of 2020, banks relied heavily on their trading desks to find arbitrage via market volatility. Fixed income, currencies, and commodities FICC trading was a particular point of strength as banks with experienced capital markets businesses notched double-digit growth to compensate for weak loan activity.

The economic recovery is building optimism among the large banks that they can grow the pipeline for bread- and butter consumer and business loans. But some bank analysts say that after the transition, money centers should remain winners among financial stocks.

We re still leaning toward capital markets bankers because the capital market construct is better than the consensus realigned at the moment, JMP Securities Senior Research Analyst Devin Ryan told Yahoo Finance Thursday.

Minutes from the Fed s last meeting show that if the Fed was to go forward with rolling those purchases in November it could begin the process in the weeks following and bring the purchases back to a full stop by the middle of next year.

Through this process, the Fed has acknowledged the risk of a sour market reaction. In September, Fed officials hoped that the strategy of inundating markets with advance notice on any pullback in quantitative easing would reduce the risk of an adverse market reaction to a moderation in asset purchases. Wells Fargo WFC CFO Mike Santomassimo told reporters Thursday he feels the Fed will be able to avoid any abrupt movements in markets.

Tapering isn t going to be a surprise to anybody, I think we've been talking about it again for quite a long period of time, Santomassimo said.

Even if market volatility surfaces, the bank executives noted that monetary policy changes are unlikely to rock the boat on loan and deposit growth. JPMorgan Chase JPM CFO Jeremy Barnum said Wednesday that deposit growth likely won't reverse until the Fed starts to actively unwind its asset holdings — a conversation the Fed is far from having at the moment.

Even when the Fed starts to hike interest rates, deposit costs may not dramatically rise. The CEO of Bank of America BAC said on Thursday that 62% of its bank accounts are in non-interest bearing core transactions.

We feel good about long-term deposit growth, Moynihan said, shrugging off the impact of changes in the monetary supply.

Brian Cheung is a journalist covering the Yahoo Finance bank, focusing on Fed, economics and banking business. You can follow him on Twitter bcheungz.