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

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.”

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