The central bank increased rates by 0.75 percentage points, to range between 1.5% and 1.75%. Although this is a big one time jump, the overall rate is still low comparative to historic levels.
At the Fed’s press conference chair Jerome Powell acknowledged that this hike was a set away from recent history, calling it an “unusually large one” and that he “did not expect moves of this kind to be common”.
However, given the generational high inflation the US is experiencing, it is expected the Fed would be maintaining this aggressive approach for at least one more round, as Powell said a hike of either 50 or 70 basis points “seems most likely at our next meeting”.
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The market reaction was mixed to this new policy step, with some asset managers believing that the Fed was spot on, and others saying it missed the mark in trying to handle inflation
Ronald Temple, co-head of multi-asset and head of US equity at Lazard Asset Management, was in the former camp, remarking that the Fed had “nailed it”.
He said that recognising that hiking more now means less later, the Fed “demonstrated its resolve to tame inflation without undermining its employment mandate”.
Many investors would have been calling for an even bigger hike, Temple said, but that would have been the wrong call.
“The Fed understood that the combination of rate hikes and QT already takes the US into uncharted territory with significant risks to growth. The hike today sent exactly the right message to markets,” he said.
However, not all commentators were as reassured.
James Athey, investment director, abrdn, said that the Fed had scored an “unnecessary own goal” with this policy.
He explained: “By the Fed’s own definitions their policy operates largely through financial conditions.
“The opening lines of chair Powell’s press conference took an aggressive looking hike and wrapped it in sufficient caution and nuance that rates are falling, causing a decline in the dollar and a significant rise in equities. This is a meaningful easing of financial conditions – the exact opposite of the Fed’s intentions today.”
Charles Hepworth, investment director at GAM Investments, was equally pessimistic, commenting that given growth forecasts have “massively altered”, with just 1.7% growth forecast for this year versus the 2.8% projections back in March, an “aggressively hiking Fed playing catch-up in the face of a slowing economy is a strange policy path”.
He said that the “good news” was that the US was in bear market territory and “has priced in what the Fed seems not to have done. Earnings just need to hold up relatively well from here, now that the multiple contraction has already happened, but sadly that remains the big unknown.”
For many investors, interest rate hikes in general may be first time thing, with inflation and the macro backdrop making portfolio allocation trickier.
Salman Ahmed, Fidelity International global head of macro and strategic asset allocation, said he “remained cautious” running an underweight on both equites and credit, as well as US fixed income versus other developed markets.
“As we pass through this phase of strong hawkishness, we think this set-up of views makes sense,” he said.
Ahmed added that credit remains a vulnerable asset “given the scope for a serious slowdown and recession the current Fed induced tightening can precipitate”.
“However, we also think we are nearing the point where damage to growth which is in the pipe-line will start to dominate inflation as the primary concern for both policy makers and markets,” he explained.