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Wednesday 15 June 2022
June 2022 | On 15 June, the Fed hiked the Fed funds rate by 75 basis points (bp), to 1.50-1.75%, the first 75bp rate rise since November 1994. Chair Jerome Powell confirmed that recent readings regarding consumer inflation and inflation expectations caused committee members to realize a hike of that size was necessary.
01 | Chair Powell remained hawkish as he described the Fed’s focus on bringing down inflation. He was careful not to dismiss the possibility of a 100bp rate hike and reiterated the Fed remained data-dependent.
02 | The Fed is not on a preset course to raise the funds rate by another 75bp at July’s FOMC meeting, but rather remains data-dependent. Powell stated the 75bp rate hike is unusual and will not become regular policy.
03 | We maintain a cautious investment bias, given that the outlook formonetary policy and its impact on inflation and the economy remain both fluid and uncertain. The likelihood of the Fed achieving a soft landing is clearly declining.
Unless otherwise stated, all information contained in this document is from Amundi Asset Management US (Amundi US) and is as of June 16, 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’ focus is shifting from the poor growth/inflation mix in the UK to the extremely negative external balance picture. On September 23, the government announced an additional 0.5% of GDP in unfunded tax cuts. The reaction of UK assets recalled actions we used to see only in emerging markets. The market is giving a strong signal that it is no longer willing to provide capital to fund the UK’s external deficit position. The correlation between interest rates and the currency signals that the market is questioning the credibility of UK policymakers’ actions.
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.
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