20-21 September FOMC meeting: the move into restrictive territory

  • The Federal Open Market Committee (FOMC) meeting and statement: On 21 September, the Fed hiked the Fed funds rate by 75bp, to 3-3.25%, the third consecutive 75bp rate hike, and the fifth rate increase in 2022. This means the central bank has raised rates by 3 percentage points this year, clearly prioritising its aim to tame inflation even if it means damaging economic growth.

  • Press conference: Chair Powell was more hawkish than expected, making it clear that he wants to move rates into restrictive territory in order to control rising prices. This means unemployment forecasts were increased for this year, 2023 and 2024 which are in any case above the Fed’s long run projections. On the other hand, economic growth predictions were downgraded.

  • Market reaction and investment implications: The markets responded in a risk-off manner, with equities falling owing to concerns over growth and the dollar rising in a flight to quality move. Furthermore, the yield curve inverted as yields on the policy sensitive 2Y bonds rose, and 10Y yields fell marginally. We maintain a cautious stance on risk assets, favouring the quality side of the markets in both equities and credit, with a particular focus on liquidity and balance sheets. On duration, we believe government bonds could offer protection at a time when risks of a ‘hard landing’ have increased. We stay close to neutral with an agile, tactical stance.

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