The lift-off in rates continues
Source: Bloomberg. Federal Funds Target Rate – Upper Bound (FDTR Index)
Last week the Fed raised rates by a 4th consecutive 75 bps rate, something widely expected by investors given that inflation is running at multi-decade highs. Markets were not surprised and Fed Chair Jerome Powell said “It is very premature, in my view, to think about or be talking about pausing our rate hikes” adding that he did not believe the Fed had yet “overtightened,” leaving the door wide open for the pace of rate hikes to remain aggressive.Worried Investors
Despite the cautionary tone by Powell, investors remain anxious as the Fed tends to lift rates until something in the markets goes awry. During the last 11 hiking cycles, 8 of them ended in a recession – ample evidence that the central bank increases to the point where something in the market snaps and the economy breaks. The main reason for that (terrible) track record is central banks’ forward guidance is based on lagging economic indicators such as unemployment and core inflation. That is why monetary policy works with a long lag: last week’s hikes won’t affect inflation tomorrow, but they could change it 9 to 12 months from now.
The first of the rate hikes was just 8 months ago, so the effects are now starting to emerge and Consumer Price Index (CPI) may continue to fall. Moreover, another major driver of inflation money supply (M2) has fallen sharply (the yellow line in the graph above) which should help further ease inflationary pressures.
It seems likely that the Fed may reduce the size of its rate hikes beginning in December, but it will likely depend on how the inflation outlook evolves. At this point inflation expectations seems to be rolling over judging by the 10-year Treasury Inflation Protected Securities (TIPS).
All data points to inflation moderation, possibly signaling the end of the tightening cycle. Let’s not forget that policymakers have already responded with the most aggressive tightening campaign in 4 decades. Terminal rates have probably reached their ceiling at around 5.0 – 5.3%. Therefore, the Fed could gradually slow its pace of tightening and pause over the next six months as inflation continues to decline.
Moving from the late cycle towards the recessionary phase of this cycle here are some possible market outperformers.
Precious metals (Gold, Silver)– classical inflation hedge, historically less volatile, potential diversification, outperforms fiat money.
Health care – safe-haven investment with a history of stable revenue and earnings, very recession resilient.
Energy – the energy sector has reported massive profits this year, thanks to geopolitical events that lead to a surge in fuel prices.
Sandeep joined Leverage Shares in September 2020. He leads research on existing and new product lines, asset classes, and strategies, with special emphasis on analysis of recent events and developments.
Sandeep has longstanding experience with financial markets. Starting with a Chicago-based hedge fund as a financial engineer, his career has spanned a variety of domains and organizations over a course of 8 years – from Barclays Capital’s Prime Services Division to (most recently) Nasdaq’s Index Research Team.
Sandeep holds an M.S. in Finance as well as an MBA from Illinois Institute of Technology Chicago.
Violeta joined Leverage Shares in September 2022. She is responsible for conducting technical analysis, macro and equity research, providing valuable insights to help shape investment strategies for clients.
Prior to joining LS, Violeta worked at several high-profile investment firms in Australia, such as Tollhurst and Morgans Financial where she spent the past 12 years of her career.
Violeta is a certified market technician from the Australian Technical Analysts Association and holds a Post Graduate Diploma of Applied Finance and Investment from Kaplan Professional (FINSIA), Australia, where she was a lecturer for a number of years.
Julian joined Leverage Shares in 2018 as part of the company’s premier expansion in Eastern Europe. He is responsible for web content and raising brand awareness.
Julian has been academically involved with economics, psychology, sociology, European politics & linguistics. He has experience in business development and marketing through business ventures of his own.
For Julian, Leverage Shares is an innovator in the field of finance & fintech, and he always looks forward with excitement to share the next big news with investors in the UK & Europe.
Oktay joined Leverage Shares in late 2019. He is responsible for driving business growth by maintaining key relationships and developing sales activity across English-speaking markets.
He joined LS from UniCredit, where he was a corporate relationship manager for multinationals. His previous experience is in corporate finance and fund administration at firms like IBM Bulgaria and DeGiro / FundShare.
Oktay holds a BA in Finance & Accounting and a post-graduate certificate in Entrepreneurship from Babson College. He is also a CFA charterholder.
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