Federal Reserve approve another hike in its benchmark interest rate – industry reaction

by | Jul 28, 2022

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The Federal Reserve approved another hike in its benchmark interest rate on Wednesday, in an attempt to tackle decades-high inflation.

Finance professionals have reacted to the situation:

Marcus Brookes, chief investment officer at Quilter Investors: “The Federal Reserve has today delivered back-to-back 75bps rate hikes as it looks to increase its fight against inflation. It will have been incredibly disappointed with the latest inflation figure and ultimately it will remain in aggressive mode until CPI begins to prove less resistant than it has already. With the ECB now following the lead of The Fed and the Bank of England, central banks in developed markets are now solely focused on getting inflation down and easing the burden on the wider economy.

“While much of the market will have been expecting this rate hike and market moves limited off the back of it, it will stoke fears that we are nearing a recession in the US. The labour market remains incredibly tight and as such we should not be surprised if we start to see some weakening in that data. Jerome Powell is facing a tough balancing act and it will be incredibly difficult to achieve a soft landing.

“We are seeing clear evidence of a consumer slowdown with Walmart yesterday warning on Q2 and full year earnings due to pressure on general merchandise sales as consumers adjust to the squeeze on disposable incomes. A large part of the US economy is consumption and there is still a feeling that the US may be raising into a slowdown. That said the US may end up as the ‘least dirty shirt’ compared to the rest of the global economy as the Fed has a reputation for reversing course quickly if needed. 

“We think the US remains a resilient market for investors and while volatility may remain present in the short term and yields rise higher, we still see opportunities over the longer-term, especially once inflation finally washes out of the system. For now, however, while the current market is difficult for investors, what this does show is the importance of having a well-diversified portfolio and the protection it can provide.”

 

Oliver Jones, Asset Allocation Strategist, Rathbones: “The Fed’s decision to raise rates by 0.75 percentage points again today came as no surprise given the surge in CPI inflation last month, but with the economic outlook clearly worsening, the pace of tightening looks likely to slow from here.

“Policymakers resisted the temptation to follow the Bank of Canada with a shock-and-awe 1 percentage point increase, noting that “recent indicators of spending and production have softened”, and Chair Jerome Powell talked in his press conference about the likelihood of below-trend growth and a narrowing path to avoiding recession. In fact, there have been numerous signs in the past couple of months that the economic outlook is deteriorating. Consumer confidence continues to weaken, and initial jobless claims have been climbing steadily since the first quarter of this year.

“The housing market – probably the part of the economy most sensitive to interest rates – is cooling, with monthly home sales now much lower than at the start of the year. The forward-looking new orders components of key manufacturing surveys have fallen to contractionary levels. And the yield curve has flattened considerably since early June.

“Meanwhile, there has been a little good news on the inflation front, despite the awful June CPI report. Energy and food prices together added 4.4 percentage points to US CPI in June, but the steep falls in global commodity prices from the highs last month mean that contribution should soon shrink. Global goods supply chains continue to unclog too, which is already helping to reduce goods inflation. The road back to low inflation is still a very long one – a great deal needs to go right to get it back to 2-3% by the end of 2023 as the consensus expects – but the headline rate may at least start to fall soon.”

 

Dan Boardman-Weston, CEO and Chief Investment Officer at BRI Wealth Management, said: The Federal Reserve has increased interest rates by 0.75% to a range of 2.25%-2.5%, in line with market expectations. The 0.75% increase was expected by the market as the Fed attempts to subdue inflation before it becomes entrenched. Whilst inflation is currently running at the highest level in 40 years, there have been tentative signs that a combination of decreasing supply pressures and demand has caused inflation to peak.

“The Fed has been frontloading rate rises and this is likely to continue for several more months until the inflation outlook becomes clearer. The Fed has a difficult balancing act though as the current inflationary pressures require higher levels of interest rates but the slowing economy could really do with a more accommodative stance. 

“2022 has been a pivotal year for monetary policy and we’re likely to know before 2023 whether the Fed’s attempt at a soft landing has been successful or not. However, the current economic data doesn’t look particularly healthy and it seems increasingly likely that the oft talked about recession will become a reality.”

 

Olumide Owolabi, senior portfolio manager at Neuberger Berman: “The Fed today unanimously raised monetary policy rate by 75bps, taking funds rate to 2.25% – 2.50%, the FOMC’s longer run estimate. A decision that was largely expected and priced-in by the market.

“There were very minimal changes when compared to the June meeting statement. The sentence on Covid related lockdowns in China have been removed and there were no dissents this time around. The statement’s characterisation of the current economic situation this time acknowledged softness in production and consumer spending however liked the labour market as job gains remained elevated with a low unemployment rate. Most importantly, it was re-iterated that the key focus for monetary adjustments remains singular – “committed to returning inflation to its 2 percent objective”.

“A key takeaway for us was the lack of a clear-cut forward guidance for upcoming meetings, other than the sentence that was kept in the statement – “anticipates that ongoing increases in the target range will be appropriate” the pace and magnitude of future monetary rate adjustments was ambiguous. Fed chairman Jerome Powell in his press conference attempt at offering some guidance by stating “a large increase could be appropriate at our next meeting” was too vague as the statement was qualified by the committee’s willingness to switch to a data dependent approach going forward.

“Overall, the Fed action today was interpreted as dovish by the market, judging by price action despite the broad consensus on the size of rate hike – terminal rates pricing shifted down by 10-15bps, US Treasury yields were lower led by the front end that led to a steeper curve dynamic.

“We expect the decision today to be interpreted as being past Fed peak hawkishness and as such, risky assets could find support in the near-term.”

Robert Tipp, chief investment strategist at PGIM Fixed Income: “The Federal Reserve’s latest 75bps rate hike was accompanied by a more nuanced tone. While it emphasised continued vigilance in fighting inflation, it acknowledged the slowdown in certain economic segments.

“Now the FOMC has hiked the funds rate into the range that most Fed officials think is neutral, Fed Chair Jerome Powell indicated that, from here, the Fed will be making decisions on a meeting-by-meeting basis. Given the confluence of more mixed economic data and expectations that lower energy prices will at least help moderate headline inflation in July’s CPI reading, we anticipate the Fed’s pace of rate hikes will likely slow down a bit from here.

“However, the current economic environment – with its major upheavals and shifting cross currents in demand and supply conditions – has created an unusually heightened degree of uncertainty as to where the economy is headed from here. Powell noted several times that the Fed’s overall aim is to bring economic growth not just back down to potential, but to also temporarily lower it somewhat below potential in order to allow supply conditions time to catch up.

“But this suggests a narrow target zone for the Fed as there may be a fine point between tightening enough to curtail demand conditions, while not tightening so much as to choke off much-needed investment that would benefit supply conditions. That said, we agree that a soft landing is still possible. And the Fed’s shift to becoming much more data dependent at this stage of its tightening cycle likely adds to that possibility.

“The treasury market should now enter a plateau phase. With the market priced for a bit of additional hikes, it is likely time for the rates market to simply wait until either the Fed catches up or it becomes clear that a break higher or lower is warranted.

“Although next year’s prospects look quite uncertain, from a longer-term perspective, the picture seems to come back into focus. If growth and inflation are the key determinants of interest rates, then stop and consider that the current rate of nominal GDP growth has not been this high since the early 1980s and may very well not be this high again for years or even decades to come.

“If we are at a multi-decade high in growth and inflation, then we are probably at what will turn out to be a multi-decade high in interest rates as well. So, once the Covid reopening demand is gone, the supply chain issues are resolved, and underlying secular trends pull the economy back towards the pre-Covid configuration of moderate growth and inflation, several things seem highly likely: there will be a reprise back to lower interest rates; from that vantage point looking back, current rates will look high in retrospect; and the peak in rates for this cycle – whether already behind us or yet ahead in the coming quarters –  seems destined to set a high watermark for some time to come.”

 

Robert Alster, CIO at Close Brothers Asset Management comments: “The Fed’s decision to raise rates by 0.75% is no surprise following stronger than expected inflation data in June. Over the first half of this year, the US has experienced a red-hot labour market and low unemployment rates and, as energy and food prices have increased, we’ve seen a stronger month on month increase in core inflation.

“However, Chair Powell has emphasised that the impact of already executed rate hikes may not yet be apparent, and the pace of hikes may need to slow to allow the FOMC to take stock. Given labour market tightness, some weakening in the economic environment will be necessary, and survey data and jobless claims are early signs of this. US GDP data this week will be backward looking but the data, due out on Thursday, is expected by economists to be weak. It doesn’t have to miss these expectations by much to show a second straight negative growth period in Q2 of this year, a signal typically observed as a sign of recession. “

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