In line with market expectations, the US Federal Reserve (the Fed) raised its official Fed Funds (cash) rate by 25 basis points last Wednesday.
The “dot plot” of Federal Open Market Committee (FOMC) members’ interest rate projections were also revised sharply higher. The median projection now expects the Fed Funds rate to increase to 1.9% by the end of this year, up from a 0.9% projection at the December 21 meeting. So, compared to just 3 months ago, the Fed has changed its policy guidance from 3 rate hikes in 2022 to 7 hikes. This implies a hike at each of the remaining 6 meetings this year. While this is a significant shift, it was largely in line with market expectations, with pricing sitting between 6 and 7 rate hikes in the run up to the meeting.
The Fed’s near-term GDP growth expectations were revised lower, though the unemployment forecast was unchanged, while the Fed’s inflation forecast was raised significantly. Fed Chairman Jerome Powell cited the Ukraine invasion as a source of added uncertainty that could increase inflationary pressures and dampen economic growth.
With a US hiking cycle now finally underway, how are asset markets likely to perform over the medium-term? While history never exactly repeats, it often rhymes, so we have examined the history of Fed hiking cycles for some clues. We explore:
- Does the history of hiking cycles give us an investment roadmap?
- Equities typically continue to do OK
- What about the reaction of the bond market?
- Staying constructive on the outlooks for stocks
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Written by
David Cassidy, Head of Investment Strategy
David is one of Australia’s leading investment strategists.