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The Federal Reserve takes a hawkish turn

Federal Reserve Chair Jerome Powell indicated rate hikes are on the horizon.

26 January 2022

The first Federal Reserve meeting of the year and the most important one in setting market direction. Given broad sell-offs in equity indices across the world so far this year, in part driven by increasing hawkishness from Fed members in previous meetings, this meeting had the potential to either upset the markets further or attempt to be more palliative. What we learnt was the Fed is still set to end the asset purchase facility by early March and will look to shrink its balance sheet at some undefined point in the future, after it has started hiking rates. It also noted that with inflation being now far from transient, the appropriateness of raising rates soon is imperative. All in all, there was not much in its statement to spook markets that hadn’t already been priced in – nor was it a walk-back of previous hawkish comments that would have otherwise threatened its credibility.

However, when Powell gave his press conference 30 mins after the statement, markets did indeed begin to become a little more spooked. He mentioned that there is “quite a bit of room to raise rates without threatening the labour market” and the markets seem to infer that that could be more than the four hikes currently priced in this year. In one sentence he has turned equity markets, that were quite well bid post the FOMC statement, flat to negative. Ouch.

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Charles Hepworth

Investment Director
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