Fed hikes rates by 0.5%; investment experts share their views

by | May 5, 2022

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Following the news that the US Federal Reserve has increased rates by 0.5% – the biggest hike since 2000 – investment managers are busy digesting the news as well as the statement released by the Fed. The Fed’s key short term rate is now at a range of 0.75% to 1%.

But were investment experts surprised by the move? Check out the views below to find out:

Allison Boxer, US Economist at PIMCO still believes in an ‘expeditious’ pace of rate hikes commenting:

“The Federal Reserve managed to deliver the largest rate hike since 2000 while at the same time surprising market expectations somewhat on the dovish side. The main news from the press conference was that Powell pushed back on the 75 basis point hikes that markets had started to price in. While the statement focused only on inflation risks and Powell underscored that the Fed is squarely focused on getting inflation back to target, he also acknowledged that the Fed needs to be nimble as it navigates incoming data. This is consistent with our view that an “expeditious” pace of rate hikes will continue as the Fed uses the summer to quickly reverse pandemic era rate cuts, but ultimately will need to be “nimble” in navigating downside risks to growth.”

Salman Ahmed, global head of macro and strategic asset allocation at Fidelity International, continues to believe that the Fed will hike less thank market expectations 

“As expected, the Fed hiked rates by 50 basis points today and announced its quantitative tightening program. The overall tone was hawkish, but critically, Chair Powell ruled out scope for 75 basis point hikes for now. Further 50 basis point hikes remain on the table over the next two meetings. This is the most aggressive move since 2000, but Fed hawkishness has been building into this meeting. We continue to think that, ultimately, the fed will hike less than market expectations, but for now the hawkish stance is likely to remain intact given the strong state of the labour market and inflationary dynamics. The Fed committed a policy mistake last year by letting inflation run out of control, and as a result, it could be walking a narrow road for some time as it looks to balance the tightening path without creating an accidental recession. When it comes to asset allocation, we remain cautious given the overall hostile Fed stance.”

David Goebel, Investment Strategist at Tilney Smith & Williamson reminds us that this only ‘rewinds’ the market’s expectations to where they were only a few weeks ago as he comments:

“The Federal Reserve increased rates by 50bps as expected at their meeting yesterday, the first time they have done so since May 2000.  This lifts the target range to 0.75% – 1%.  They also announced details of the beginning of Quantitative Tightening, the process by which the size of the balance sheet will be reduced. They will begin by adjusting the amounts reinvested of principal repayments received, allowing their holdings of Treasuries and mortgage-backed securities to decline in June at an initial combined monthly pace of $47.5 billion, increasing to $95 billion over the following 3 months.

“Prevailing high levels of inflation and the tight labour market likely pushed the Fed to vote unanimously to move rates at a higher pace than had been anticipated a few months ago.  Despite the unexpected fall in Q1 GDP on Thursday, officials remained upbeat about the domestic economy, citing strong consumer spending and business investment.  They did acknowledge downside risks from the war in Ukraine and the potential continued supply chain issues which could be caused by strict COVID policy in China. The Fed’s $8.9 trillion balance sheet, which ballooned during the pandemic as they bought securities to calm markets and reduce borrowing costs will begin to be reduced in June.  Initially at a pace of $30 billion in Treasuries and $17.5 billion in mortgage-backed securities a month, increasing over the following three months to $60 billion and $35 billion, respectively. At this pace, the balance-sheet runoff will see the Fed’s portfolio approach its pre-pandemic size by 2024. They did not mention plans to make outright sales of assets.

“Although a 50bps increase was the core expectation, futures markets had suggested a chance of a 75bps increase prior to the meeting.  Furthermore, in comments made by Powell after the meeting, he appeared to rule out 75bps increases at future meetings, saying they weren’t “actively considering” larger increases, although he did add that “If higher rates are required, then we won’t hesitate to deliver them”.

“This manifested itself in a bull steepening of the treasury curve, where all yields fell modestly but by slightly more at the shorter end.  There was more reaction from the equity market, where the S&P 500 rose 3%, its largest 1 day gain since the May 2020.  Growth stocks broadly outperformed value, bucking the recent trend.

“While yesterday’s announcement may have disappointed the most hawkish market participants, it is important to remember than this only ‘rewinds’ the market’s expectations to where they were only a few weeks ago.  The Fed reiterated its expectation of “ongoing increases in the target range”, which markets are interpreting as further 50bps increases at each of the next two meetings.  This, combined with smaller moves at meetings for the remainder of the year would bring the Fed funds rate to around 2.5% – 2.75% by the year end.

“With the Fed remaining “highly attentive to inflation risks”, absent a serious growth shock or large downside surprise in realised inflation, we expect them to deliver these increases and therefore continue to favour value over growth in equity markets, despite yesterday’s correction.”

Dan Boardman-Weston, CEO & CIO at BRI Wealth Management, suggests that the risks of a hard landing seem to be increasing commenting:

“The Federal Reserve has increased interest rates by 0.50% to a range of 0.75%-1% and announced plans to start unwinding their balance sheet. Higher interest rates were expected by the market as inflation continues to hit multi-decade highs and the Fed feels it needs to act quickly before high inflation expectations become entrenched. The current conflict in Ukraine and the covid induced lockdowns in China are putting further upward pressure on the rate of inflation and this is expected to be one of many interest rate increases during 2022. The Fed is expected to frontload their interest rate increases and we’re likely to see them tighten quickly over the coming months to a rate that dampens economic activity. The Fed has a difficult balancing act though as the current cost of living pressures combined with higher interest rates means that the growth outlook for the US is gloomier than it has been since the dark days of Covid. A large portion of the inflation continues to be supply driven and interest rate increases are not going to assist with these contributory factors to inflation. 2022 will likely be a pivotal year for monetary policy and the risks of a misstep and a hard landing seem to be increasing.”

AXA IM’s Head of Macroeconomic Research, David Page is questioning what this might mean for policy as he comments:

“The Fed Chair explained that this was an incredibly difficult time to provide forward guidance and that the Fed had had to adapt quickly to evolving conditions and would be nimble and watch the data going forwards. He then delivered the most precise forward guidance of any Fed Chair, suggesting a precise rate path through September. With the Fed apparently in such a belligerent mood we are forced to reconsider our view that July’s meeting will deliver a 0.25% hike, something that would leave our end-year rate view at 2.75%, not 2.50%. However, we also believe the Fed is directly influencing expectations to slow the economy more quickly and we consider that such a slowdown will reduce the need to continue rate hikes into next year. We and the Fed will fine tune our outlook for July’s meeting in the light of the upcoming payrolls reports – where survey evidence has begun to hint at a moderation in job creation – and inflation, where there are already some signs that inflation is peaking. 

“Market reaction to the meeting was interesting and highlighted the difficulties of gauging the required scale of future policy tightening. Even as the Fed Chief was seen as fulfilling market expectations for rate hikes this year and galvanizing the broader economy for the effect of rate hikes, financial markets appeared to react to the fact that the Fed was not considering 0.75% hikes – something that was little more than a risk case – and lowered their expectations. 2-year and 10-year Treasury yields dropped by 17bps and 7bps to 2.64% and 2.92% respectively. The dollar (in DXY terms) fell by 0.75% and the S&P index jumped by 2.7%. This marked easing in financial conditions was unlikely to be what the Fed hoped or expected from its press conference. Whether that reflected a myopic focus on 75bps rate hikes, or a more considered fear of economic slowdown the easier financial conditions raise the chance of more Fed rate hikes to come. ”  

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