Fed Raises Rates Again – Reactions From Wealth Managers

The world’s most powerful central bank has raised interest rates again, and the language its chief used has suggested to some investors that a peak is in sight. If they are correct, that is another matter. Here are the reactions of wealth managers.

Yesterday, the US Federal Reserve raised interest rates by 0.75%, or 75 basis points, to a range between 2.25% and 2.5%. Fed Chairman Jerome Powell did not go into detail on future rate hikes and hinted that there would be a possible slowdown in those hikes.

The comments in his remarks to the press after the announcement prompted the shares to rise. The assumption seems to be that rates don’t go much higher from here. It should be noted that inflation is close to double digit levels in the United States and many other developed countries. Debate remains over the extent to which it is transitory or more entrenched.

Here’s a roundup of some wealth managers‘ and economists’ views on the Fed’s decision.

Kiran Ganesh, Multi-Asset Strategist, UBS Global Wealth Management
“By opting for 75 basis points, rather than 50 basis points or 100 basis points, the Fed is trying to aim for the eye of the needle as it seeks to underscore its inflation-fighting credibility while remaining mindful risk of over-tightening For now, markets are likely to accept the ‘online’ release well, but inflation and the pace of rate hikes will need to slow before we see a more durable recovery.

Salman Ahmed, Global Head of Macro and Strategic Asset Allocation, Fidelity International
“The continued focus on inflation and the strength of the labor market were conspicuous in the press conference comments as two main drivers of the pace of the upside. We believe a significant slowdown is already underway and will begin to show up in hard data in the weeks and months to come.

“However, continued strength in the labor market – with only very tentative signs of some easing in demand and supply pressures – and the Fed’s emphasis on lagging hard data mean that “Another 75 basis point hike is possible at the next meeting. The risk here is that the Fed will tighten policy too much too quickly, making a hard landing inevitable.”

“Markets have eased the level of terminal rates in this cycle to around 3.25% with a more concentrated profile in recent days. We agree with this current setup, but think another hawkish push from the Fed, driven by strong (lagging) data, is possible in the near term. Given the pressure to visibly reduce inflation via monetary policy, mixed signals mean that the near-term policy profile from here remains uncertain.

Richard Flynn, Managing Director UK, Charles Schwab
“Today’s announcement underscores that the Fed is firmly focused on reducing inflation. More rate hikes are likely in the second half of the year, and it’s worth remembering that in addition to rate hikes, the Fed is also tightening policy by allowing its balance sheet to contract. In other words, Treasury securities held by the Fed are allowed to mature without the Fed reinvesting the proceeds – a strategy called quantitative tightening.

“Aggressive Fed tightening risks tipping the economy into recession. GDP growth was negative in the first quarter and probably weak in the second quarter. Key growth indicators, such as real estate activity, new business orders and consumer spending, have all declined in recent months.

“The result of tight monetary policy in a slowing growth environment is likely to be further flattening or inversion of the yield curve, underperformance of the riskier segments of the bond market and a weaker dollar. As the tussle between inflation and recession fears plays out in the second half of the year, we expect to see some very volatile markets.

Dolores W. Simon