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Fed hikes interest rates with a further six rises expected in 2022  Thumbnail

Fed hikes interest rates with a further six rises expected in 2022

The US Federal Reserve will raise interest rates by 0.25 percentage points, it announced late on Wednesday evening (16 March), while the Fed’s so-called dot plot now shows a total of seven hikes for 2022.

First hike since 2018

The move marks the Fed's first rate rise since 2018 and is an attempt to tackle inflation, which is at a 40-year high in the United States at 7.9%.

Last night the Fed said it will likely take longer for inflation rates to return to 2%, with inflation still projected to be above 2.3% in 2024.

When the rate rise was announced, Jerome Powell, chair of the Federal Reserve, said: "We are attentive to the risks of potential further upward pressure on inflation and inflation expectations.

"The committee is determined to take the measures necessary to restore price stability. The American economy is very strong and well-positioned to handle tighter monetary policy."

Focus on the dot plot

Fidelity International global head of macro and strategic asset allocation Salman Ahmed said the main policy change was the shift in the so-called dot plot, where the median dot now shows seven hikes for 2022.

"Given our stagflationary baseline which got exacerbated by the Russia/Ukraine war, it appears that the Fed's focus will be more on inflation fighting despite the uncertainty created by Ukraine war based on today's meeting," he said.

"This creates further headwinds for asset markets as the central bank put remains further out of money in this cycle. From an asset allocation perspective, we remain cautious on both equities and credit markets."

Sekar Indran, senior portfolio manager at Titan Asset Management, was also focused on the change to the number of interest rates due this year.

"Despite rising recession risk, the Fed's dot plot reaffirmed the market's hawkish pricing going into the meeting of a further six hikes this year," he said.

"The trade-off between stabilising inflation and economic output is growing wider as the New Keynesian theory of ‘divine coincidence' breaks down in the face of mounting negative supply shocks.

He continued: "Historically, equity markets have rallied over the twelve months following the beginning of a rate hike cycle but this time around markets also have to contend with the prospect of quantitative tightening with a challenging macroeconomic and geopolitical backdrop adding to the volatility."

Seema Shah, the chief strategist at Principal Global Investors, said the change to the dot plot was as a result of the Fed playing catch up, having been slow off the mark to tackle inflation.

"Probably six months after they should have started raising interest rates, the Fed has finally started lift-off. But even the most anticipated Federal Open Market Committee (FOMC) meeting still managed to deliver a surprise: the dot plot shows seven policy rate hikes this year!

"With inflation already almost quadruple their target, the Fed is playing catch-up and clearly recognises the need to get back in front of the inflation situation."

Fed ‘behind the curve'

Shah was not the only commentator to point out that the Fed had been slow to react to rising inflation. The UK's counterpart the Bank of England, for example, rose interest rates in early February.

James McCann, the deputy chief economist at abrdn, said: "The Fed is behind the curve, and today's meeting shows a central bank rushing to catch up. It signalled that rates will rise at every meeting this year, and potentially more if inflation does not behave.

"The message from the Fed was that the economy can handle this adjustment, though we expect higher rates to prove more disruptive for growth and the labour market than the FOMC has factored in, especially as policy mores from supportive to tight in 2023.

"This does not mean that the central bank can't engineer a soft landing, but there is not an immaterial risk of recession given the precedent for policy tightening to kill business cycles."  

Hinesh Patel, portfolio manager at Quilter Investors added: "It is early days in the hiking programme, but we finally have lift-off at the Federal Reserve. Despite being behind the likes of the Bank of England this has been a very well telegraphed and managed rate rise, even with the threats of Omicron, China's regulatory crackdown and now the knock-on effects of the war in Ukraine.

"None of these threats, however, are resolved by monetary policy and with the inflation shock reverberating around the system the Fed needs to move back to normalcy, at least to build in some insurance for when easing will once again be required in the future. They have recognised this is expected to go higher than previously anticipated. They are starting to turn hawkish and have been spooked by the inflation rate."


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