Fed’s 2022 finale: A hike, obviously

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Wednesday 14 December 2022. Past performance is never a guarantee of future performance.

In a year dominated by soaring inflation and interest rates, it was always going to end one way at the US Federal Reserve’s (Fed) final Federal Open Market Committee (FOMC) meeting of 2022 – with a rate rise.

The decision to hike by 0.5% takes the federal funds rate to a range of 4.25% - 4.5%, and sees the central bank finally break its recent cycle of four consecutive 0.75% moves since June.

Reaction to yesterday’s decision was fairly muted due to the predictability. Equity markets dipped in the immediate aftermath, but it wasn’t enough to detract from a relatively decent run of form in the US during Q4.

Festive friction

While both the rate rise, and the scale of it, were already priced in by markets, the most-recent hike rubber stamps 2022’s place in the history books for many of the wrong reasons.

Central banks in major economies have strained to curtail rampaging inflation, having initially been slow off-the-mark to lift rates when now-entrenched inflation was labelled as ‘transitory’. It’s been a bruising year for policymakers, economies, and investors alike.

Amid heightened scrutiny, and having been criticised for foggy communications this year, Fed chair Jerome Powell was crystal clear that smaller rate hikes don’t mask the severe level of uncertainty facing the US economy: “I just don’t think anyone knows whether we’re going to have a recession or not. And if we do, whether it’s going to be a deep one or not ... it’s not knowable¹.”

A new normal?

As we covered in our November article, Fed ups rates again, the reality of higher-for-longer rates is something the world needs to wake up to.

Even with the possibility of a fast and shallow US recession, it is unlikely that economic conditions will return to pre-pandemic levels soon. The central bank remains dogged in its pursuit of a long-standing 2% inflation target, and that looks a long way off for now.

Yesterday’s FOMC decision is also a sign of how much, and how fast, things have changed over the last 12 months. After a prolonged period of historically low interest rates, central banks have been unleashing a monetary policy arsenal to an extent few could have imagined this time last year.

As chair Powell stated in his press conference, it’s an approach that looks set to continue: “I would say it’s our judgment today that we’re not in a sufficiently restrictive policy stance yet, which is why we say that we would expect that ongoing hikes will be appropriate.”¹

Not a particularly merry Christmas

Unfortunately, the final chapter of 2022 is lacking in cheer, but that’s not to say that investors should head into 2023 in pessimistic mood.

Smaller rate hikes in the world’s most influential economy point towards US inflation having peaked, and the case for long-term investing remains in place. As with the phrase ‘one swallow does not make a summer’, neither does a bad year detract from the bigger picture for long-term investors. Unfortunately, this has been a particularly tough year, scarred by volatility and even war in Europe. All eyes will be on the US to see how quickly it can shake off the shackles of 2022.

For more context, you can read our special US chapter in this year’s Outlook 2023 report: US economy: Rays of hope?

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