Fed stays aggressive but its language offers investors forward-looking guidance
The Federal Reserve may not have surprised anyone by announcing its fourth consecutive rate hike of .75%, raising its target rate to 3.75% to 4% yesterday, but it did raise some eyebrows by suggesting it may tame some of its future increases.
“The markets were largely expecting a 75 basis point hike today, but what was more interesting was the language of what we can expect going forward,” Grant White, managing partner and portfolio manager for Endeavour Wealth Management at IA Private Wealth, told Wealth Professional.
“The markets, and investors, were hoping that they’d take a bit of a pause here and assess what’s going on and maybe hint at lower rate hikes going forward – not that we’re done the rate hikes. I don’t think that the market should expect that, but the rate hikes are going to be a little bit lower going forward. The language did give us that, which is why we saw the market pop a bit after.”
In making its announcement, the Federal Reserve (Fed) said that it is increasing the rate because it was still striving to reach a 2% inflation rate, but it “anticipates that ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2% over time.
“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.”
White said that while we don’t yet know when the hikes could end, the market now is expecting another .5% hike in December and perhaps two more .25% increases in early 2023. He doesn’t, however, expect inflation to get to 2% for a couple of years. Given the war in Ukraine and other factors, he believes inflation could run at 3% to 4% for awhile.
“I think the Fed would rather be a little bit heavier on the rate hikes now and a little bit soft later, just because they are desperate to get inflation in line,” he said, noting it can take six months hikes to work their way through. But, he added that the Fed could pull back on the hikes if the U.S. economy goes into recession, as it technically did for the first two quarters this year.
“So, we could expect to see the rates come back a little bit from there – not to where they were at the beginning of this year. I don’t think anybody should be expecting that, but it’s more than likely that they’ll peel them back a little bit, probably toward mid to late next year.”
White said that, while the markets reacted as expected right after the announcement since the Fed had previously hinted at the increase in announcements, this is the best investment opportunity time since the bottom of the 2008-2009 market. While many newer advisors may never have seen such a volatile time, he said the key is to ensure they have a long enough client timeframe, ideally at least five years, though the equity market could improve in the next three years.
“You really need to be careful about how they’re matching your clients’ assets to their goals and diversifying the portfolio appropriately,” said White. “But, on the flip side, for longer-term money, I don’t think most advisors have ever seen an opportunity nearly this good in their careers. So, they should be advising their clients of that because it’s an incredible opportunity that they might never get again, or at least not for a very long time.”