FOMC Fallout
After yesterday’s post, we felt it necessary to provide a post-Fed meeting update. It is widely accepted that this Fed meeting was ‘the most interesting in 30 years’ given the state of the economy, policy and markets.
Following the meeting and press conference a few things are clear:
- The Fed has acknowledged it has an inflation problem (no kidding!)
- The Fed is determined to combat this problem and its main tool to do this is to increase interest rates.
- The Fed acknowledged that the labour market is extremely tight and so raising rates and allowing unemployment to increase is something they are prepared to accept.
- The Fed ‘shocked’ the market with a 0.75% raise in order to give it some flexibility going forward as it is easier to cut rates (to stimulate growth) if rates are high than if they are low. The starting point of a rate-cutting cycle is very important.
- The Fed will continue to be ‘data dependent’ and so future inflation, consumer confidence and growth readings will dictate the speed of rate increases but the path in the short term is higher.
How did the markets take this?
- Risk assets initially rallied strongly but are now down at near-term lows.
- Yields fell initially but have started to increase again.
- The markets are now effectively starting to price in a recession in the US in 2023 – if we get no recession then risk assets are very cheap at the moment.
- Markets expect another 2.25% of rate increases into February next year – this is a lot of tightening which is already priced into rates markets.
What does this mean for positioning?
- Assets with inflation linkage contractually tied to returns will likely remain in favour. Examples include infrastructure, renewable energy and select property investments.
- In a low growth / recessionary world then investors will prefer quality companies over cyclical economically sensitive businesses. Quality should perform on a relative basis but if we have a deep recession then absolute returns from equities will be difficult.
- Given levels of uncertainty, despite a lot of bad news being priced in, it is prudent to retain defensive positioning and exposure to assets uncorrelated with equity markets should add value.
- There are pockets of value available given falls in valuations we have seen so far this year.
Opinions constitute our judgement as of this date and are subject to change without warning.