Federal Reserve Meeting

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What is interesting about Thursday’s meeting is not only the fact that the Fed raised interest rates by 0.25%, but how we got there. The bond market had been anticipating a more hawkish Fed but, until recently, the committee preferred to run the economy hot in line with Democrats in the White House. This, unfortunately, allowed inflation to get out of hand – in part due to supply chain issues. The Chairman recognized that the Fed had obviously been behind the curve and it is now steadily catching-up. The Fed dot-plots (see Graph below) now forecast six rate hikes this year in line with the market, while Quantitative Tightening could start in May.

The risks are:

  • Interest rates overshoot as they often do to calm inflation, leading the economy to slowdown
  • More elevated oil prices on the back of the war in Ukraine lead consumption to weaken.
  • The Fed stays behind the curve for too long, allowing salaries to significantly beat inflation and productivity gains.

The Federal Reserve can make a fairly reasonable forecast of the economy 6 to 18 months from now – as the exceptional character of supply chain issues somewhat improve. The question is therefore what happens in 2024 and beyond. Can the US economy maintain enough momentum with higher interest rates? US equities assume so: the reality is that this is not forecastable.

What does it mean? While US equities are more fairly valued than they used to be, they remain more expensive than European stocks.
Source: Nordea Investment Funds S.A. and Bloomberg

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