Catalyst/Rational Instant Reaction & Analysis: Fed Raises Interest Rates 75 Bps

Catalyst/Rational Instant Reaction & Analysis: Fed Raises Interest Rates 75 Bps

What was once (rather recently) deemed as “off the table” for the Fed this month, the FOMC today took aggressive action, announcing the largest interest rate hike since 1994 (75 bps) as they seek to combat runaway inflation. See below for insights and initial reactions from the investment management teams across the Catalyst and Rational Funds networks:

Hunter Frey, Analyst at Catalyst Funds, Rational Funds, and Strategy Shares:

• The Federal Reserve raised interest rates 75 bps (the largest increase since 1994), which was in line with market-wide expectations amid increasing inflation (8.6%), a decrease in retail sales month-over-month, and the University of Michigan’s consumer sentiment survey’s 3.3% long-term inflation expectations.
• Fed optionality supported by front loading 50 bps to 75 bps rate hikes in the coming FOMC meetings are expected, though the Fed maintains the narrative of policy flexibility to manage the dynamic economic data without rejecting the potential for 100 bps hike (with a more aggressive Fed velocity in the near-term more likely).
• Fed Chair Jerome Powell mentioned that supply issues continues to drive inflation abiding by our narrative of a stagflation environment with unemployment rates likely to increase for the Fed to control inflation.

Leland Abrams of Wynkoop Financial and Portfolio Manager of an income fund:

• With the Fed now seemingly no longer on autopilot (which the market likes), the bond market is in sync with FOMC predictions, a very positive development.
• The knee-jerk reaction to the 75 bps hike was a little sloppy, with the 10-year U.S. Treasury seeing a three-tick wide in the bid/offer spread versus typical half tick wide market.
• Today’s FOMC announcement had a bull steepening effect, with yields lower across the curve.

Simon Lack of SL Advisors and Portfolio Manager of an energy infrastructure fund:

• The Federal Reserve is moving rapidly to return their policy rate to neutral, which they regard as 2-3%.
• Although current inflation remains high, most private forecasters and the Federal Reserve expect inflation to fall substantially over the next year.
• We view any consensus expectations of a Fed-induced recession next year as premature as we expect the Fed to slow/pause tightening on signs of economic weakness.