By Adriaan Pask
As widely expected, the US Federal Reserve (Fed) raised its interest rate by 25 basis points to 0.50% at the conclusion of its monthly meeting on 16 March 2022.
This marks the first increase in borrowing costs since 2018. Furthermore, policymakers anticipate the reduction of the bank’s holdings of Treasury securities, agency debt and agency mortgage-backed securities to start at the next joint sitting.
·Looking ahead, Trading Economics reported that “The Fed now sees rate hikes at each of the six remaining meetings this year, with the fed funds rate reaching 1.90% by year’s end.”
PCE inflation – which measures the change in goods and services consumed by all households - is projected to rise to 4.30% in 2022, compared with the 2.60% projection in December, while the economy is expected to grow by 2.80% this year, below expectations of 4%.
IMPACT
Wall Street finished strong as investors digested the long-anticipated rate hike which prompted a relief rally in stocks. The Dow rose 1.55%, the S&P 500 advanced 2.24% and the Nasdaq rallied 3.77% on Wednesday evening. Naturally, financials, industrials and retailers were the biggest winners. Investors also kept a close watch on the war in Ukraine, as reports of progress on ceasefire talks improved sentiment.
Locally, the JSE ended a 3-day losing streak climbing 4.04%, its biggest single-day gain since March 2020, with Naspers and Prosus jumping 20.93% and 21.07%, respectively.
The US 10-year Treasury yield reached 2.24%, the highest since May 2019, before retreating to 2.19% at 21h30, while the yield on the 2-year Treasury bond rose to 2.00%, further straightening the yield curve.
The US Dollar Index, which gauges the value of the greenback against a basket of six currencies dropped by as much as 0.60% to 98.47 points on Wednesday after gaining 3% since the start of the Russia-Ukraine war.
The rand strengthened against key global currencies trading at R14.93/$, R19.65/£ and R16.48/€
ASSESSMENT
The central bank’s decision to raise the target range for its federal funds and reduce bond purchases is broadly in line with our expectations as we have previously alerted investors that pandemic emergency support policies would recede as economies improve. Policymakers need to start hiking rates so that they have the flexibility for stimulation when the next market shock hits.
The Fed’s policy rate will be among the biggest determinants of where asset values and economies will go this year. Large amounts of capital will either be propelled or constrained by interest rate hikes in 2022, which will ultimately have a bearing on businesses, consumers and the broader investment environment.
Russia’s invasion of Ukraine and associated events are also likely to create additional upward pressure on inflation and weigh on economic activity in the near term. We are mindful of the impact of higher inflation and interest rates on high-duration stocks throughout a tightening cycle and will adjust our products if warranted
Adriaan Pask is the Chief Investment Officer at PSG Wealth
BUSINESS REPORT