The Fed has been leading the charge on the tightening front within the developed market (DM) universe and has implemented a rate hike cycle that investors haven’t witnessed since the “Volcker” years1 of the 1980s. Incredibly, the “Volcker-esque” increase in Fed Funds this year has resulted in the Fed Funds target range going from a zero interest rate policy (ZIRP) as recently as March to 4.50% in December, a total of 425 basis points (bps) in rate hikes. The graph below highlights how the current aggressive tightening cycle has compared to the previous two more methodical rate hike episodes.
Source: Bloomberg, as of 12/15/22.
In terms of the eagerly awaited “Powell Pivot,” we have always been of the opinion that it was never about 50- or 75-bp rate hikes. Instead, what truly matters is where the terminal rate is going and how long it will stay there. Monetary policy acts with a lag, and the Fed appears to be now taking this “officially” into account in its decision-making process. As of this writing, a reasonable case scenario has the voting members taking the Fed Funds trading range up to 4.75%–5% before hitting the pause button. The next unknown will be whether the Fed goes into “raise and hold” mode in 2023 or entertains rate cuts during the second half of next year. Based on recent Fed speak, at the present time, there seems to be a consensus not to reverse course too soon, but as we’ve seen, things can change quickly.
1 Refers to the years that Paul Volcker Jr., an American economist, served as the 12th chairman of the Federal Reserve from 1979 to 1987. During his tenure as chairman, Volcker was widely credited with having ended the high levels of inflation seen in the United States throughout the 1970s and early 1980s.
Unless otherwise stated, all data as of November 2022.
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