Fed Raises Rates As Inflation Fears Rise: Reactions From Wealth Managers

Finally, the US central bank pressed the interest rate trigger, raising borrowing costs and signaling more to come. Wealth managers accustomed to an era of near-zero interest rates must adapt. Here are their reactions.

The US Federal Reserve said yesterday it would raise the benchmark cost of borrowing by a quarter of a percentage point, or 25 basis points, to a range between 0.25% and 0.5% from close to zero.

Further rate hikes are likely, as they were aimed at stemming high inflation, which is currently at the highest levels since the early 1980s. In February, consumer price inflation in the United States rose 7.9% over the previous year.

Unexpectedly, the reality of monetary policy tightening by the world’s most important central bank after more than a decade of ultra-low rates is sobering. It comes at a time when the economy is being hit by rising energy prices – which will likely also be a major election issue in November’s midterm races. Russia’s invasion of Ukraine and massive sanctions imposed on Moscow complicated the Fed’s thinking.

In its statement, the Federal Open Market Committee said: “Economic activity and employment indicators have continued to strengthen. Job creations have been strong in recent months and the unemployment rate has fallen considerably. Inflation remains elevated, reflecting pandemic-related supply and demand imbalances, rising energy prices and broader price pressures.

“Russia’s invasion of Ukraine is causing enormous human and economic hardship. The implications for the US economy are highly uncertain, but in the short term the invasion and related events are likely to create additional upward pressure on inflation and weigh on economic activity.

“The Committee seeks to achieve a maximum employment and inflation rate of 2% in the long term. With an appropriate firming of the monetary policy stance, the Committee expects inflation to return to its 2% target and the labor market to remain strong,” he concluded.


Here are a number of reactions from wealth managers to this decision:


Charles Hepworth, Chief Investment Officer, GAM Investments
The Federal Open Market Committee has acted on its adopted message so far this year that rates must rise. Deciding to raise the bank rate by 0.25%, the Fed warned that inflation remained too high not to act, despite the notable deterioration in financial conditions this year. While they may need to appear hawkish with inflation now stubbornly high, it’s obvious that if the committee had acted sooner, they wouldn’t have needed to act so aggressively now. With the economy slowing and financial conditions worsening, their projected trajectory is highly unlikely to materialize.

 

Dolores W. Simon