The Fed opts for another hike

Please note: The article does not constitute advice or any form of investment recommendation.

The US Federal Reserve (Fed) has ended its year of aggressive rate hiking – by raising rates yet again.  

And while it wasn’t at quite the scale of the previous four straight 0.75% hikes, the latest 0.50% move nonetheless suggests there will be more interest rate rises to come in 2023, while inflation remains elevated. 

The latest increase – the seventh by the Fed this year – brings the US benchmark interest rate to a range of 4.25%-4.5%, its highest rate in 15 years. 

However, reaction from stock markets was fairly benign, with traders having all-but-priced-in the latest Fed move, although equity markets did dip in the immediate aftermath – but this wasn’t enough to reverse a relatively good run for US equities since October. 

Clawing its way back? 

Policymakers, economies, and investors have all had a bruising 12 months.  

Wrongfooted by the turmoil in the global economy, central banks scrambled to catch up as inflation soared and became entrenched. It forced the Fed – the world’s most influential central bank - to raise interest rates at a pace unseen in decades. And along with the occasionally cloudy statements made by Fed chair Jerome Powell this year, it leaves 2022 consigned to the history books for many of the wrong reasons. 

America’s economic engine is also unlikely to fire up to pre-pandemic levels any time soon, even if the US narrowly avoids recession in 2023. As he conceded on the day, Powell can’t be sure on how soft a landing is possible for the US economy. “No-one knows with any certainty where the economy will be a year or more from now,” he said. “I also don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not ... it’s not knowable.” 

Fed keeps talking tough 

This new reality of higher-for-longer rates is something investors need to stay live to. The Fed chair also announced on Wednesday that the central bank won’t be changing its 2% inflation goal, meaning more monetary tightening is likely to come before the central bank can achieve this 2% target. 

“I would say it’s our judgment today that we’re not in a sufficiently restrictive policy stance yet, which is why we say that we would expect that ongoing hikes will be appropriate,” reflected Powell1. 

Cautious optimism 

While the final chapter of 2022 is lacking seasonal festive cheer, there’s no reason for long-term investors to despair.   

With the Fed easing the pace of its interest rate rises going into 2023, there are finally signs that US has peaked. A similar pattern is also emerging in other key economies, with the Bank of England immediately following the Fed’s lead with its own slower pace hike of 0.50%.

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