What was only transitory is now the priority for the global central banks. Inflation is rattling the stock market investors worldwide. With US Fed hiking interest rates in succession, the quantum of next few rate hikes remains to be seen in light of upcoming inflation data.
Many experts are expecting a milder recession and a soft landing after rate hikes but that may largely depend on supply chain concerned easing out and fall in commodity prices.
Arvind Chari, CIO, Quantum Advisors
Some Central Banks seem to be in a hurry this year. The US FED has hiked rates by 150 bps between March and June.
Most Central Banks spent the latter part of 2021 by initially ignoring inflation to remain growth supportive, then hoped that inflation would be ‘transitory’. They recognised its severity and began acting on it, however, they would wish and pray now for some divine intervention.
‘Festina Lente’ which means ‘make haste slowly’ in Latin., is an oxymoron. The Central Bankers, given how much they had mollycoddled the markets, wanted to act on inflation but at a measured pace.
In the latter part of 2021 and the pre-war months of 2022, they spent on communicating that they will hike but at a measured pace. They did not want to rock the markets. That approach is not working.
The FED expects that a FED Funds rate averaging 3.5% over the next 2 years will be enough to get inflation back to its 2% range with some growth sacrifice but no major increase in unemployment. If this happens, great.
Long bond yields will fall, and equities will trend higher. This is what they term, a soft landing. Markets are currently priced for a soft-landing scenario.
If it doesn’t play out that way, we are in some trouble. If PCE inflation (FEDs measure) falls only to 4% in 2023 from the current levels of 5.5%, it would force the FED to hike way more than current expectations and tighten its balance sheet at a faster pace. This would mean higher bond yields, weaker equities, and an economy’s path towards recession. A hard landing.
In Equities, near-term concerns dominate. However, an increase in formal employment, a recovery in residential real estate, better control over farm prices, and a healthy corporate/bank balance sheet suggests that medium-term cyclical recovery will continue despite near-term headwinds. Stock market corrections will remain an opportunity to add to your long-term portfolio.
Pranjal Kamra – CEO, Finology Venture
The Federal Reserve hiked the interest rate by 75 basis points, apparently the highest in some three decades. This didn’t come as a surprise if you look at the worsening inflationary pressure. While the rate hike could help; word has it, a ‘mild recession’ is on the cards.
Vivek Goel, Co-founder and Joint Managing Director, Tailwind Financial Service
In a dramatic shift in gears, the US Federal Bank stepped up the rate hike by 75 bps, biggest since 1994, along with a pledge to do ‘whatever it takes’ to tackle inflation.
Fed Chairman Jerome Powell recognised that the path to curbing inflation while maintaining the growth momentum in the economy is “not getting easier. It’s getting more challenging.”
While the pace of hike itself is aggressive, it was largely priced in by the markets after Friday’s inflation data was announced at record levels.
In addition to the hike, Fed’s forecast – ‘the dot plot’, which in December showed expectations of Fed funds rate barely topping 1% this year, is now unanimous in forecasting 3%+ levels.
With the next Fed meeting planned in July itself, there is a high possibility of another hike of 50-75 bps, being acknowledged by the Fed chair too.
This is in line with the commitment to bring inflation to the target 2% and remarks around being highly attentive towards growing risks from higher inflation.
Interestingly, the statement from the previous Fed meeting saying “Committee expects inflation to return to its 2 percent objective and the labor market to remain strong.” to now saying “The
Committee is strongly committed to returning inflation to its 2 percent objective.” Clearly highlighting that for now, their priority is limiting inflation.
While the initial reaction from US markets has been positive, two hours of post announcement trades might be early to extrapolate the market reaction.
Further, with a downward revision in GDP forecast for 2022 to 1.7% from 2.8%, the fears around recession are likely to grow.
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