Another 75 bps Increase – What the Fed Rate Hike Means for Investors

As the Fed continues to push interest rates higher to combat inflation (today announcing a 0.75% increase), portfolio management teams and investment analysts from across Catalyst Funds and Rational Funds weigh in on what this means for investors:

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

• Powell’s rhetoric increased market uncertainties about the trajectory of monetary policy. Interest rates remain set to increase further than previous projections with the velocity of rate hikes potentially set to decrease by the beginning of Q1 2023. However, some of his rhetoric noted it may be premature to think about pausing rate hikes as inflation continues to run near a 40-year high.
• The Fed remaining hawkish makes sense as economic conditions have not contracted enough to display meaningful improvements towards a resilient job mark that remains tight (September unemployment at 3.5%) and persistent inflation.
• Overall, markets remained concerned with the velocity of Fed hikes at future meetings. The dot plot and Powell’s rhetoric align with a 50-basis point hike in December and a 25-basis point hike in January. The eventual destination remains the most pivotal factor to the lagging trajectory of the economy, potentially supporting less tightening. As Powell said, the destination of terminal rates matters more than the path used to get there and with a higher overall destination possible, markets reacted negatively supported by historical correlations with equities. Short duration credit, NARMBS, cyclicals (including commodities), small caps (due to historically low valuations), and uncorrelated asset classes (special situations) remain in the best risk/reward arena.

Simon Lack, SL Advisors, and Portfolio Manager of an Energy Infrastructure Fund.

• The Fed’s super-sized rate increase of 75 basis points today is possibly the last large increase for a while. Powell feels pressure to keep increasing rates as his prior rate increases have not changed inflation barometers in a significant manner. However, even with rate hikes having minimal effect on inflation, they are still causing a reaction in the market therefore making high-rate hikes unsustainable in the long run.
• The housing market is often viewed as a good means to signify downturns and upturns in the market. And, based on recent performance, the housing market would seem to say we are headed for a steep decline.

Daniel Rudnitsky, SMH Advisors, and Senior Portfolio Manager of an income strategy:

• The Federal Open Market Committee said that “ongoing increases” will still likely be needed to bring rates to a level that are “sufficiently restrictive to return inflation to 2% over time”. Our expectation based on this is that the pace of moving higher will slow as the Fed considers a couple of points that will likely begin to lessen the trajectory of rate hikes. These points are as follows:
  • Rate hikes take around 9-12 months to be fully incorporated. Therefore, most of the Fed’s rate hikes have not yet been “felt” by the real economy.
  • Many markets have experienced recession-like indicators.  2s/10s Treasury curve: -50 bp; S&P 500 -18% YTD; Copper -30% from peak; manufacturing lower, etc.
• Whether they raise 50 bps or 75 bps in December, the FOMC may begin to talk to the market about a slower pace of rate hikes in the future. This will mark the beginning of the end for rate hikes and better performance for bonds due to a coming economic slowdown. For a period, slowing demand for goods, services, housing, and commodities should allow inflation to slowly reign in as the Fed would like to see.
• Importantly, Chairman Powell said that “It is very premature to be thinking about pausing” rate hikes. However, the Fed press release and Chairman Powell’s conference indicated that it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made.” Chairman Powell also stressed that “we still have some ways” before rates were tight enough.

Joe Tigay, Equity Armor Investments, LLC, and Portfolio Manager Of An Alternative Equity Fund.

Mr. Tigay provided his insights in a video, which can be seen below: