Investment Strategies

US Fed Raises Rates Again, Signals Further Rises – Wealth Managers' Reactions

Editorial Staff December 15, 2022

US Fed Raises Rates Again, Signals Further Rises – Wealth Managers' Reactions

With inflation remaining elevated – but perhaps with some indications of a peak – the US central bank has pulled the rate rise trigger again. The Swiss and UK central banks raised interest rates today.

The US Federal Reserve voted for a 50-basis point (0.5 percentage point) rise in official interest rates yesterday amid concerns about continued inflation pressures. Recent data may suggest there is a slight easing of the price pressures, but policymakers in the US and around the world continue to wrestle with the impact of over a decade of ultra-low rates, as well as the supply chain disruptions caused by Covid. 

The Federal Open Market Committee (FOMC) approved a move to raise the benchmark federal-funds rate to a range between 4.25 per cent and 4.5 per cent, a 15-year high. Fed chairman Jerome Powell signaled that the central bank would raise rates further in 2023 but by smaller incremental steps, raising hopes that a peak is likely to be reached at some point next year. 

Elsewhere, the Swiss National Bank, which had for half a decade operated a negative official interest rate policy to hold down a very strong Swiss franc, has raised rates. The SNB yesterday raised its benchmark sight deposit interest rate by 50 basis points to 1.0 per cent from 0.50 per cent, as expected. This is the third SNB hike in a row. In the UK, the Bank of England raised rates 50bps to 3.5 per cent, as expected.

Here are reactions from wealth managers, economists, and investment houses.

Charles Hepworth, investment director, GAM Investments
"Another three hikes of 0.25 per cent are now being penciled into markets, then a pause until rate cuts of a full 1 per cent are collectively in the offing in 2024 according to the Fed. Markets predictably are not reacting well to the hawkishness in the commentary, having hoped that enough tightening had already been applied. With inflation still so high, ending the hiking cycle so soon was never going to be the Fed’s view and continued tightening (albeit much smaller in quantum) is warranted."

"We see one more 25 bps hike from the Fed at its next meeting in February taking the terminal rate to 4.50 to 4.75 per cent, followed by a pause until November 2023. At that point we expect inflation to have eased sufficiently enough to provide room for the FOMC to cut rates to support the economy. Markets also seem to have largely dismissed the “dot plot” and Powell’s comments, still pricing in around 50 bps of rate cuts next year, explaining the relatively muted reaction from markets to last night’s event. The hawks may have come out to play, but markets continue to disobey."

Samy Chaar, chief economist, and Bill Papadakis, macro strategist, Lombard Odier
"The “step-down” in US rate hikes, with 50 basis points (bps) delivered by the Federal Reserve on December 14, happened as expected. Importantly, chair Jay Powell showed openness to slowing the pace further in coming months, noting that a very substantial amount of tightening has already been effected.

The November consumer price index (CPI) figures again showed US inflation heading in the right direction. Disinflation continued in goods, where supply chain pressures, shipping costs, and consumer demand continues to fall. Fuel and energy prices continue to fall; healthcare figures are looking much more benign. 

While the Fed’s inflation projections were mechanically marked up from their September estimates, for once it does not feel like risks are on the upside. Chair Powell did not push back strongly against the de facto easing in financial conditions that rising equity markets have delivered, as he did after the previous rally.

Nevertheless, inflation in some areas of services spiked higher, and housing components are still rising strongly. We expect the Fed to raise rates by 25 bps at both of its next two meetings, to a peak of around 5 per cent in the first quarter, as it targets additional slowing in housing and labor markets.

We believe the Fed will then keep rates on hold, at a high level, for most of the year until inflation converges close enough to 2 per cent. Price pressures will take time to normalize. We see rates on hold until at least the final months of 2023. At this point, inflation should have fallen to around or just below 3 per cent, a level at which rate cuts look more plausible, and a story that we see as predominantly one for 2024."

Tai Hui, chief market strategist, APAC, JP Morgan Asset Management
"The range of fed funds' estimates for 2023 is quite narrow with only two members seeing policy rates below 5 per cent next year. This suggests a higher terminal rate at or above 5 per cent will be reached in 1H23.

The committee is all but cementing a need for below-trend growth and a pickup in unemployment to meet their objectives, but that a soft landing is still possible.

The persistent excess demand for labor is expected to keep wages and core services (ex-housing) inflation elevated. Therefore, while the rise in the unemployment rate could be modest, it is a necessary evil to kill inflation.

We now expect the Federal Reserve to raise rates by 0.50 per cent in early February and by 0.25 per cent on March 22 before pausing, though a shift down in the size of rate increases, as signaled in the press conference, could see the Fed raise rates in 25 basis point increments over the first three meetings of the year.

Given the US market reaction after the FOMC meeting, we expect Asian markets to end the week with a more cautious tone. We would need more weak inflation data for the Fed to tone down its hawkishness. We maintain our view of staying defensive with a greater emphasis on fixed income in case the Fed’s tightening leads to further deceleration in economic growth in the US and weakens corporate earnings. That said, the medium-term prospects of China’s economic reopening and Asia’s domestic demand resilience could be a bright spot as the US and Europe face more growth challenges."

Richard Carter, head of fixed interest research, Quilter Cheviot
“Inflation may be heading back down, but it is still very much present in the system. Indeed, service inflation remains a concern and will become the next key metric to watch. Despite the positive news, there is still a great deal of uncertainty over the future of the economy and the direction of interest rates."

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