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Fed meeting: Hawkish humility

Market update
High yield
US dollar
Interest rate
US Equities

Fed meeting: Hawkish humility

Jan 28, 2022

  • At its January 25-26 meeting the FOMC kept rates unchanged at 0-0.25 per cent, as expected, and announced that its quantitative easing program will come to a conclusion in early March. That said, the press conference had a hawkish tone, with the market pricing in a higher risk of more rate hikes as a result
  • One of the key themes of the press conference was the topic of quantitative tightening, or balance sheet reduction. The FOMC released a set of guiding principles they will follow to announce the size, pace, and the composition of the monthly reductions but many observers remain concerned about the amplitude of the reduction in the balance sheet. We now believe that quantitative tightening will start in Q3, compared to our earlier forecast of it starting in Q4
  • During the press conference, real yields rose, hurting bonds, gold and stocks. But much is now priced into Fed futures, and we think the bond market will stabilise, with the 10-year Treasury yield remaining in the 1.5-2 per cent range. We maintain our risk-on bias and an overweight to equities as our preferred asset class as US and global growth are supportive of earnings. Indeed, the Fed chair painted a very positive picture of the US economy, especially its labour market
  • However, he also said the Fed would be humble and nimble, given the uncertainty around inflation. As this can lead to volatility in markets, we suggest investors consider non-correlated asset classes such as hedge funds and focus on building resilient and diversified portfolios
  • For fixed income investors, we continue to focus on carry opportunities as we believe Treasury yields will continue to trade in a range. We continue to look to high-yield and emerging market credits as an opportunity to improve potential returns. As for the US dollar, the tighter Fed policy and attractive relative interest rates suggest a continued upward glide for the currency

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