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

The Federal Reserve once again raised interest rates 75 bps on Wednesday. See below for insights and initial reactions from the investment professionals across the Catalyst Funds and Rational Funds networks:

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

• The Fed’s unanimous 75 basis point hike continues their narrative to tame inflation with front-loaded monetary policy and flexible hawkish guidance. We expect unemployment to rise as economic equilibrium adjusts to lower supply side inflation. Additionally, spending and production may slow despite pent up pandemic demand. As discussed in the Catalyst 2022 Mid-Year Outlook, a 75 basis point rate hike was expected. However, Q2 GDP data (set to be released on July 28) remains the most anticipated by markets.

• Markets interpret consistent monetary policy as a positive sign (S&P up around 2% after announcement) that the United States could narrowly avoid a recession if the consumer remains supportive for a potential soft landing. Some positive signs have surfaced, with the Atlanta Fed GDPNow model (for real GDP growth) projecting a 0.4% GDP growth for Q2 2022, avoiding a structural recession. Unfortunately, uncertainty looms as record high oil prices, supply bottlenecks, geopolitical headwinds, slower spending and production may weigh on domestic growth, pushing the U.S. into a recession.

• Overall, we still believe that markets have largely already priced in a recession (though we remain in the first few innings to bringing inflation down) with a limited downside if a structural recession does occur tomorrow. On the other hand, if a recession is avoided, markets may have bottomed, propelling a great investment inflection for equities and credit investors.

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

• Federal Reserve Chair Jerome Powell mentioned that while another 75 bps increase in the Federal Funds rate is possible in September, no decision has yet been made about future increases.

• The FOMC expects to see some softening in the labor market in the near term, which would help moderate inflation expectations and therefore potentially reduce the need for a future large increase in the Federal Funds rate,

• The stock market responded positively to signs that the Federal Reserve will soon be at neutral, defined as 3-3.5%, where they may pause further action to re-assess conditions.