Anna Stupnytska, Global Macro Economist at Fidelity International has reacted to the recent Fed meeting, “Fed matches hawkish rhetoric with hawkish action”.
“Without delivering the full 100bp, the Fed still managed to outhawk the markets – through the September dot plot and the SEP, reinforcing Powell’s hawkish message at Jackson Hole. As data continue to point to inflation pressures becoming broader and more entrenched, with the handover of pressures from predominantly energy to services, fighting inflation remains the Fed’s singular point of focus. At the same time, continued economic strength and a hot labour market point to a limited trade-off – at least for the time being – between growth and inflation.
“As more clarity on the Fed’s current policy reaction function emerges, we believe the bar for major central banks in general – and for the Fed itself in particular – to turn less hawkish going into year-end is very high. The long-awaited central bank ‘pivot’ now seems further away – until we see strong hard data evidence of monetary policy tightening transmitting to the real economy, the Fed will continue on its hiking path.
“We note, however, that if financial conditions tighten significantly, we may well see an earlier pause, but we are far from that right now and uncertainty remains very high given many moving parts. From a medium-term perspective, we continue to think the US 10-year real rate above 1% is unsustainable but it will take time for related damage to come through.
“In terms of asset allocation, the multi-asset team remains cautious on risk assets, maintaining equities and credit underweight and a strong overweight to cash. The team remains neutral on duration amid continued central bank focus on inflation, while keeping an eye on the deteriorating growth outlook. Within equity regions, the preference is for US equities given their defensive properties despite expectations for continued Fed hawkishness.
“In credit, we are defensively positioned in higher quality developed markets relative to emerging markets, where we see headwinds from dollar strength. In FX, the team is neutral, but expressing positive USD views through select Asian currencies, where central banks are at different points in their policy cycle.”
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