Three Big Hikes And The Fed’s Still Walking

Three Big Hikes And The Fed’s Still Walking
Stéphane Renevier, CFA

over 1 year ago2 mins

The Federal Reserve (the Fed) raised interest rates by three-quarters of a percentage point for the third consecutive time, and warned that more big hikes could be ahead if inflation doesn’t fall decisively toward its 2% target. In fact, the Fed now forecasts that its key federal funds rate will reach 4.4% by the end of this year, on its way to a 4.6% peak in 2023, from its current level between 3% and 3.25%. That sets the stage for another big hike when the Fed meets next in November, and blunts any hopes that the Fed might think about cutting rates anytime soon.

While the size of this week’s hike was no surprise to investors, Fed Chair Jerome Powell came out as more “hawkish”, or aggressive on rates, than expected, and the Fed’s higher new “dot plot” (the forecast path of rates shown in the chart) was a bit startling for anyone hoping we’d soon see an easier stretch in the hiking cycle. Mind you, there’s some chance that rates won’t need to go so high. Remember: the Fed’s mandate is low inflation and maximum employment. So, if inflation falls more decisively, or something in the economy “breaks” the labor market, the Fed could pause in its hikes, or even reverse course. But given how sticky US inflation has been, and how long it takes for rising rates to impact jobs, that’s very unlikely, at least for now.

What’s more likely is this: we experience high inflation, rising interest rates, and deteriorating growth over the short term. It’s basically the worst environment for stocks. And while Treasury bonds generally benefit from slower growth, they might fail to perform as expected if inflation and interest rates remain high. And that leaves the US dollar as one of the only games in town: it tends to appreciate when the Fed is hiking aggressively, and when global growth is slowing. Unfortunately, the higher the greenback rises, the more it adds pressure on the global economy.

With risks so elevated, it’s no time to play hero. Make sure you’ve got a decent chunk in US dollar cash, so you can gradually buy stocks, bonds, and commodities as prices fall. The more you accumulate at lower levels, the better your long-term returns will be.



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