An increase in US interest rates seems likely after the Federal Reserve (Fed) met yesterday, with chair Jerome Powell stating that the central bank would raise the federal funds rate in March “assuming that conditions are appropriate for doing so.”
With US inflation at its highest since 1982 – it hit 7% in December last year – the Fed has come under increasing pressure to act.
The central bank has already increased tapering its asset purchases, with the quantitative easing (QE) programme expected to end in March, three months earlier than had initially been expected.
Joost van Leenders, senior investment strategist at Kempen Capital Management, said: “The Fed won’t hike rates before the tapering is done by March. So, the focus of today’s meeting was not on this meeting, but what the Fed would say about a potential rate hike in March and about reducing its balance sheet later this year.”
The latest rhetoric appeared to confirm suggestions that the US central bank will raise rates three times this year, with each hike expected to be at or above 25 basis points.
David Roberts, head of the Liontrust Global Fixed Income team, said that the March hike could be as high as 50bps, which markets may not be prepared for.
He said “we are in for a lot more volatility in the months ahead” as further monetary policy tightening looks likely.
“There are also increasing signs the general market is worried about the possible extent of action, with major equity indices moving into negative territory year-to-date,” he added.
The Fed previously stated that it would aim to reduce inflation to 2.6% in 2022, but Jon Jonsson, senior portfolio manager at Neuberger Berman said that it may not drop below 3% due to persistently higher prices in the housing market.
He added: “We think the declines in inflation will be shorter-lived and shallower than expectations.”
The European Central bank (ECB), which has been slower to react to rising inflation than other central banks, will be holding its first monetary meeting of the year this week.
Nicolas Forest, global head of fixed income at Candriam predicted it will maintain the same robust stance on inflation. He said the ECB is “preferring to stay on the sidelines with negative rates and accommodative rhetoric. A position that will be difficult to maintain all year”.