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U.S Central Banks Raise Rates by 75 bps

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November 3, 2022

Yesterday, November 2nd, the U.S Central Bank announced another rate increase, lifting the overnight policy interest rate by 75basis points (bps) to 4%, marking the fourth consecutive round of a 75bps increase. The size of the rate hike was consistent with market expectations. The Fed’s statement offered a limited view on the pace of the hikes going forward, however, new language acknowledged the lagged effect of monetary policy, which suggests that the Fed is perhaps becoming more patient to see the effects of tighter monetary policy working its way through the economy, after 6 consecutive hikes in this tightening cycle.

Specifically, Chairman Powell noted,  “In determining the pace of future increases in the target range, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

·       Based on the Federal Open Market Committee (FOMC) year-end median policy rate projection of 4.4%, in line with futures market implied rate, we expect that a smaller round of rate increase (50bps) is likely when the Fed meets again in December, barring another upside inflation surprise in the October and November CPI reports. However, the policy rate is expected to remain in restrictive territory as inflation remains elevated and is not yet in the rear-view mirror.

·       The Fed acknowledged that inflation remains elevated, reflecting supply and demand imbalances related to the pandemic, higher food and energy prices, and broader price pressures. However, there are signs that inflation is moderating as commodity prices continue to rollover, global supply chain problems continue to ease, home sales in the U.S have slowed significantly, home builder confidence has declined close to Covid-19 lows, and prices paid by manufacturers, which is a leading indicator of end-consumer prices, have all softened. Wage inflation, however, remains one to watch as the labour market remains tight.

·       The market responded positively in the moments after the rate announcement with a rally in equity and bond prices, as the statement opened the possibility of smaller hikes as the Fed appeared more patient and thoughtful of the lagged impact on the economy. However, market direction quickly changed in the post press briefing, where the Fed chair acknowledged that “we have some ways to go on rates”, which was interpreted as hawkish.

We know that this current tightening cycle has presented a challenging year for investors. One of our partners, NEI Investment Management, has put together a brief research report that provides analysis on the previous 9 Fed tightening cycles over the past 50 years. This piece can help provide context on how markets behave during these cycles and how patient investors may benefit over the long term.

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