Interest rates in the US will soon begin to rise according to the latest indications from the US Federal Reserve and its chairman Jerome Powell.
“I would say that the committee is of a mind to raise the federal funds rate at the March meeting, assuming that conditions are appropriate for doing so,” Mr Powell said on Wednesday, local time, after the Fed’s latest meeting.
The central bank’s bond-buying program is also set to come to an end in March with a shift towards quantitative tightening moving forward.
“Outside of an exogenous growth shock there is little that would prevent the Fed from raising interest rates at its March meeting,” commented JP Morgan Asset Management global market strategist Kerry Craig.
“However, there remains a degree of uncertainty on the magnitude and pace of rate hikes and the door is open to a potential 50 basis point jump at any meeting or more than four hikes this year.”
Mr Craig noted that the equity sell-off seen at the start of the year was linked to markets shifting their position from not expecting any rate hikes in 2022 as of last September to there now being at least four rate hikes in store for the year alongside quantitative tightening.
“However, while rising rates are likely to continue to pressure highly valued part of the equity market, we don’t see the Fed over tightening and risking the economy or a recession,” he said.
“As such, the outlook for equities remains positive on the back of still solid earnings outlook at this point in the economic cycle and value stocks should outperform as yields rise and the yield curve steepens.”
BlackRock’s CIO of global fixed income Rick Rieder said that a two-stage process of gradual departure from emergency monetary policy conditions had now begun after quantitative easing had “overstayed its welcome”.
“The first stage being a return to a more neutral, normal monetary policy and then, secondly, a potentially more restrictive policy to address what has clearly been surprisingly high and sticky levels of inflation,” he said.
“We think it is right, however, to consider these as two distinct paths, and think chair Powell appeared to suggest that type of approach.”
Mr Rieder said that three to four policy rate hikes were reasonably expected this year, alongside the end of quantitative easing and some “deliberate runoff of this excess liquidity” potentially sometime during the northern hemisphere summer.
“It is clear at this point that the Fed has inflation firmly in its sights, despite the still maturing nature of this economic recovery, but it has also very much kept the door open to adjust policy if the economy slows from here,” he said
“Still, the implication is that we will hear significantly more detail about all this at the next (March) Fed meeting. So, the markets have been starting the drum roll, and we have started to warm-up the music for the next round of Fed actions, but the band will really hit the stage in March with a new set of instruments than what we have been used to over the prior couple of years.”
