As markets had been largely expecting, the news came late yesterday that the US Federal Reserve FOMC was to hike rates by 0.75%. Despite it not being a surprise, markets still reacted negatively to the news, largely due to the statement by Fed Chair, Jerome Powell, who indicated that he is sticking with his hawkish stance.
So, what does this mean for investment markets and client portfolios? Investment experts have been sharing their views with us as follows:
Salman Ahmed, Global Head of Macro & Strategic Asset Allocation, Fidelity International: “As expected, the Fed hiked rates by 75bps, its fourth straight jumbo hike, but indicated a shift down in hike size as early as December to take into account accumulated tightening and lagged effects of the policy tightening. In order to avoid the pivot mania which struck late summer, Chair Powell also indicated the possibility of a higher terminal rate – we anticipate 5% – and defended the ongoing policy stance robustly. The discussion around forward and backward-looking data also came through with Chair Powell unwilling to concede that all pressures we are seeing currently are essentially rear-mirror dynamics.
“We continue to see elevated likelihood of hard landing risks as we move into 2023 as the policy tightening cycle works through the system. Indeed, our trackers indicate a 55% chance of recession by mid-next year. The reduction of the pace in hiking will be an important step going forward as the tightening enters the “final phase”, however, for now, the Fed remains attuned to the risk of high inflation in an economy which is still strong when it comes to hard data.”
James Athey, investment director, abrdn: “This is a well communicated and well managed message from Chair Powell. They have, as widely expected, opened the door to a slower pace of hikes going forward. As a result of the cumulative tightening so far and the pace at which it has occurred, this is very sensible given the lags involved in monetary policy. By acknowledging the strength of recent price and labour market data and indeed suggesting it will likely require a higher terminal rate versus the FOMC’s expectations in September, the Chair is effectively leaning against the market’s desire to call this a pivot and buy risk assets with both hands – a reaction which would lead to another uncomfortable and unhelpful easing of financial conditions. He has trodden a narrow path very well.”
Richard Carter, head of fixed interest research at Quilter Cheviot: “Despite cooling off slightly, US inflation remains uncomfortably high and the labour market very tight, so it comes as little surprise that the Federal Reserve has today delivered yet another 75bps rate hike. This latest increase marks the fourth in succession – as was widely expected by investors – and reiterates the Fed’s aggressive response to the ongoing economic challenges.
“However, there remains a great deal of uncertainty over where rates will eventually peak, and there is a real concern that the Fed will end up over-tightening and will tip the US into a painful recession as a result.
“Today’s statement suggests the Fed still feels it has a long way to go in its battle to tame inflation, but we can expect the pace of future rate rises to slow as we head into the new year which should provide investors with some comfort.”
Rupert Thompson, Investment Strategist at Kingswood: “The Fed as expected raised rates by 0.75% to 3.75-4% and indicated, as the market was hoping, that the pace of tightening will slow from here. However, the Fed also said the ultimate level of rates will be higher than previously expected, leading to US equities reversing their initial gains and ending the day down 2.5%. The market is as a result now for the first time pricing in rates peaking next spring at slightly above 5%. All this suggests equities are likely to have problems sustaining any gains until we are considerably closer to the end of Fed tightening, which will not be for a few months yet.”
Tiffany Wilding, North American Economist, and Allison Boxer, Economist, at PIMCO: “The Fed completed its historic 4th straight 75 basis point rate hike as widely expected, as additional upside inflation surprises since the September FOMC meeting justified further rapid monetary policy tightening. This brought the Fed funds rate up to a 3.75-4% range, meaningfully above the Fed’s 2.5% median long run estimate, as far too high inflation continues to justify contractionary monetary policy.
“The Fed also altered the forward guidance in the statement to emphasize the amount of tightening to date and the lags with which monetary policy impacts the economy. While the statement language left the door open to a further continuation of 75bps rate hikes, we interpreted the changes as setting up for a pause in the hiking cycle in early 2023.
“During the press conference Chair Powell also hinted that the Fed could ultimately reach a higher terminal rate, relative to what they were forecasting in September.
“Overall, the statement and press conference did not change our view that the Fed will likely pause between 4.5%-5%. We are separately forecasting a recession in the US in early 2023, which we think will limit the Fed’s appetite for additional rate raises, despite still elevated inflation. Nevertheless, we don’t think the Fed will cut rates until inflation starts falling later in the year.”