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Thursday 28 July 2022
July 2022 | In a widely expected move, the US Federal Reserve hiked the fed funds rate by 75bp to 2.25-2.50%, its second consecutive 75bp rate hike. The fed funds rate is within the 2 to 3% range of estimates of the long-term “neutral” rate. However, as Chair Powell reminded us during his press conference, policy needs to go beyond neutral into restrictive territory this year in order to reduce inflation.
01 | On 27 July, the Fed hiked rates by 75bp to 2.25-2.50%, its second consecutive rate hike, bringing the Fed fund rate closer to its estimates of the neutral rate.
02 | The US entered into a technical recession as Q2 GDP contracted 0.9%, led by a visible deceleration in domestic demand.
03 | Importantly, the sharp US GDP deceleration was not completely a result of Fed tightening but was caused by other drags on US consumers.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of July 28, 2022. Diversification does not guarantee a profit or protect against a loss. The views expressed regarding market and economic trends are those of the author and not necessarily Amundi US and are subject to change at any time based on market and other conditions, and there can be no assurance that countries, markets or sectors will perform as expected. These views should not be relied upon as investment advice, a security recommendation, or as an indication of trading for any Amundi product. This material does not constitute an offer or solicitation to buy or sell any security, fund units or services. Investment involves risks, including market, political, liquidity and currency risks. Past performance is not a guarantee or indicative of future results. Amundi Asset Management US is the US business of the Amundi Asset Management group of companies.
Investors expect central banks will tame inflation whatever the cost, even triggering recession if necessary. This may indeed be policymakers' approach in the short term as they seek to re-establish their credibility, but investors risk overestimating central bankers' ultimate willingness to hurt growth.. We predict that inflation will therefore be higher than many expect over the next couple of years, with important implications for asset prices.
Fed Chair Powell stated the need for a 50bp rate hike at the next couple of meetings. Powell's comments on rate hikes suggest the Fed remains comfortable with market pricing at this point, and will be even more data-dependent going forward. While there was little reaction in the financial markets following the release of the FOMC statement, after the press conference, which was not as hawkish as market expectations, there was a strong rally in risk assets.
We expect economic momentum to slow in the second half of 2022 as inflation acts as a regressive tax on consumers with huge divergences across regions, countries and sectors. However, we do not foresee a global recession. Inflation might be close to peaking in most areas, but we expect the inflationary environment to persist in 2022 and 2023.
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