Federal Reserve

Chances of a real turn in short-term interest rate policy seem to have been squandered since yesterday. According to specialists at Aegon AM, PGIM and T. Rowe Price, interest rates will remain high for several more quarters. A quick reversal in interest rate policy is unlikely. So is an early return to «normal» .

Ce sera probablement la pire mais aussi la meilleure année pour les obligations. La hausse des taux d’intérêt et des spreads de crédit entraîne des pertes de prix considérables. L’inflation est le pire ennemi des investisseurs obligataires et elle monte en flèche. Le fait que les taux d’intérêt et les écarts de crédit augmentent rapidement est une bonne chose pour les investisseurs obligataires à long terme. La panique et la volatilité créent toujours des opportunités.

La Réserve fédérale américaine a relevé ses taux d’intérêt de 75 points de base supplémentaires pour les porter de 3 à 3,25 % dans la nuit de mercredi à jeudi. La politique de l’argent gratuit touche vraiment à sa fin maintenant.

“Walking the narrow path” is an expression among central bankers about striking a fragile balance between reining in inflation and not plunging the economy into the ravine. Friday showed how difficult that task has become. 

The US equity market has rebounded some 15 percent from its low in June, helped by hopes of a Fed turnaround, better-than-expected corporate results and investors who were gloomy but invested.

The June low remarkably coincided with the peak in earnings expectations for 2022 and 2023. This means the entire price recovery can be attributed to higher valuations, made possible by lower interest rates. The fact that corporate earnings were better than expected, however, says more about expectations than about the underlying earnings trend.

The US Federal Reserve announced an expected 75 basis point interest rate hike on Wednesday evening. Inflation pain will now have to be carefully weighed against the threat of an economic recession. Equity markets reacted positively to the announced policy.  

The S&P added 2.68 percent and the Dow Jones gained almost 1.4 percent. European markets extended Wednesday’s gains in early trading. The Euro Stoxx 50 index traded 0.4 percent higher shortly after the opening.

La Réserve fédérale américaine a annoncé mercredi soir la hausse attendue de 75 points de base des taux d’intérêt. La douleur de l’inflation devra désormais être soigneusement mise en balance avec la menace d’une récession économique. Les marchés boursiers ont réagi positivement à la politique annoncée.  Le S&P a gagné 2,68 % et le Dow Jones près de 1,4 %.

The Federal Reserve is doing something else than what it says it is doing. At last week’s FOMC meeting, Fed chief Jerome Powell said that “the committee is not trying to cause a recession”. Yet it is clear that the Fed is directly linking a recession to lower inflation risks and that the Fed does want to fight inflation.

Franklin Templeton, one of the world’s ten largest asset managers, this week outlined its views on investing at a time that inflation threatens to undermine economic growth. Investors who haven’t already done so need to adapt their portfolios to take account of the new inflation-fighting interest rate environment, at least in the short term. Underpinning its investment outlook is the expectation of more balanced monetary policy risks later this year.

In the autumn of 1997, both in Europe and the United States, the ten-year interest rate fell towards 5 per cent. This was caused by the Asia crisis, which caused prices to fall worldwide. Falling interest rates and falling share prices were an unusual combination at the time.