Wealth Strategies

US Fed Tightens Again, Offers Guidance – Wealth Managers' Reactions

Editorial Staff November 3, 2022

US Fed Tightens Again, Offers Guidance – Wealth Managers' Reactions

Another day, another rate hike from a central bank. The central bank for the world's largest economy pulled the trigger again yesterday. Here are some reactions. (Update: the Bank of England also hiked rates, today.)

The US Federal Reserve yesterday raised interest rates by another 0.75 percentage point to try and curb strong inflation, taking the benchmark Federal funds' rate to a range between 3.75 per cent and 4 per cent.

When the central bank announced its move, Fed chairman Jerome Powell said officials would contemplate a smaller hike at their next meeting in December. 

The Bank of England also raised rates by 0.75 percentage points, to 3 per cent (the interest rate market has largely priced that in.) Wealth managers and their clients are having to adjust to a world of rising rates after more than a decade of quantitative easing, a process that started in 2008 amidst the financial crash and continued, particularly when the pandemic broke. Some commentators say that this process arguably created a world of “zombie” corporations addled on cheap money and surviving despite weak profit margins. The world’s major economies face a painful adjustment to more normal interest rates. Already, the process is buffeting governments – such as the UK’s Conservative Party-led administration. 

Here are reactions from firms to the Fed’s move.

Ronald Temple, head of US Equity, Lazard Asset Management
"Investors should not get ahead of themselves. Today’s FOMC acknowledgement that monetary policy acts with lags is not news. More importantly, there are still 1.86 open jobs per unemployed person in the US, double the ratio of 2019, and core inflation, driven by services, is running in excess of 6 per cent. This is not an environment in which the Fed will pivot or signal a pivot. To do so would be malpractice, and the Fed knows that. In December, the Fed will have two more inflation reports and two more jobs reports. Then, perhaps, the FOMC can signal a deceleration in tightening, but not before."

Charles Hepworth, investment director, GAM Investments
"Now at the 3.75 per cent to 4 per cent range on the Fed Funds rate, this is the sixth hike so far this year and the fourth consecutive 0.75 per cent rise. More importantly, it is the most absolute tightening seen since 1980. It is amazing to look back and see that markets expected just two 0.5 per cent hikes at the start of the year – how wrong they can be. 

Initial market reaction was positive on the back of the hike, with US equity indices reversing their earlier loses as the accompanying statement referred to the “committee taking into account the cumulative tightening of monetary policy.” This may mean that we are ever nearer to the end of this hiking cycle. Still, we expect another 1 per cent of rises before we reach terminal rates closer to 5 per cent in the first quarter of next year.

Not much has really changed and it seems that markets are looking for any apparent dovish reason to lift higher. We do not expect a pivot yet, but the “2023” pause is obviously not far off. There is one big caveat, which is that Powell and the rest of the committee want financial conditions to tighten and markets rising mean anything but that."

Salman Ahmed, global head of Macro and Strategic Asset Allocation, Fidelity International
"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 per cent 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."

Jack McIntyre, portfolio manager, Brandywine Global Investment Management
"The tone of Fed Chair Jay Powell’s comments was quite hawkish, which means the Fed still has a way to go to fight inflation, and the level of interest rates will be higher than previously expected. There were no hints of dovishness to indicate that the Fed may be poised to pause.

However, the key sentence in the FOMC comments is the one that states the Fed will consider the cumulative tightening of monetary policy, which is code for saying there has been a great deal of tightening of financial conditions already this year. This statement clearly suggests input from Vice Chair Brainard and opens the door for the Fed to slow down the pace of future rate hikes.

However, it doesn’t end them. Monetary policy today is not sufficiently tight enough. We’ll know when the Fed is done tightening; they’ll tell us by simply saying that monetary policy is sufficiently restrictive. But that’s not today’s story. Today was all about – and only about – giving the Fed flexibility or optionality to back off their path of 75 bps hikes.

We don’t know what the terminal rate will be, but Powell told us it’s higher than markets expect. CPI reports, labor reports, and the ongoing impact of China’s zero-Covid policy on global growth are all more important than any signal of Fed action. From this point on, we should think slower and steady…until something breaks."

Paul O’Connor, head of the UK-based Multi-Asset Team, Janus Henderson Investors
"The FOMC decision to make its fourth consecutive 75 bps rate hike was largely in line with consensus expectations. The big debate ahead of the meeting, was whether the Fed would be prepared to signal that it was about to slow the speed of interest rate hikes or even to hint that rates were getting close to a peak. Jay Powell did suggest that the pace of rate hikes would probably slow from here, but this was wrapped up in a hawkish set of messages. The Chairman noted that “ongoing increases” will be needed to get interest rates “sufficiently restrictive” and that Fed expectations for terminal interest rates for this cycle have risen since the September FOMC. 

From a risk-management perspective, a decent case can be made for the Fed slowing things down from here. US interest rates have risen unusually rapidly this year and are already taking their toll on housing and other rate-sensitive areas of the US economy. Economic momentum in these areas looks set to weaken further in the quarters ahead, as recent and future increases in policy rates, mortgage rates and bond yields work their way through the system. A number of other major central banks have already begun to slow the pace of their rate hikes, reflecting these concerns and financial stability considerations.

Still, as the Chairman implied, the destination of the rate cycle is probably more important than its speed."

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