Against a backdrop of rising inflation, we expect the US Federal Reserve to announce a rate hike of 25 basis points at its March meeting. While the decision should not surprise markets, the Fed will likely emphasise its readiness to stay agile in the event of stronger or more persistent inflation.
We do not expect any surprises from the next FOMC: the Federal Reserve should announce a rate hike of 0.25 percentage points to combat ever-higher inflation
The Fed should also emphasise its willingness to remain agile, and to stand ready to raise rates more aggressively if necessary
The markets should remain calm in the face of a decision for which they are largely prepared
There are no surprises to be expected from the next meeting of the Federal Open Market Committee (FOMC), which should announce a hike of 0.25 percentage points to the federal funds rate – its first increase since 2018. In order not to add stress to already highly volatile equity and bond markets, Fed Chair Jerome Powell clearly pre-empted the committee's decision. On 2 March, before the US House of Representatives Finance Committee1, he stated his desire to propose a 25-basis-point hike.
This decision is consistent with inflation that continues to rise and may not have peaked yet. The latest inflation figures do not yet reflect the consequences of the Russian armed forces’ invasion of Ukraine:
In February, the consumer price index (CPI) increased by 0.8% (the January figure was 0.6%)2.
Over one year, CPI accelerated by 7.9% (compared with 7.5% in January). This was the largest increase since 1982.
Core CPI, excluding energy and food products, rose by 0.5% (0.6% in January), and by 6.4% over one year.
The Fed’s expected decision is in line with the attention the Fed pays to second-round effects on both wages and product prices: companies have gained significant pricing power, as highlighted in the latest Beige Book. A rise in rates is also consistent with a tightening labour market, which suggests that the objective of full employment has been achieved, paving the way for less accommodative monetary policy. Finally, the Fed must react to pressures on inflation expectations. Inflation break-evens on 5-year Treasuries rose to 3.5% from 3% at the start of the year, while the 5-year/5-year inflation swap is at 2.65%3.
Mr Powell is also expected to emphasise his willingness to remain nimble, and to be ready to raise rates more aggressively, if necessary, with increases of more than 0.25% in the event of stronger or more persistent inflation. The Fed is going into emergency mode, after it missed its window to act in 2021 as the health crisis continued to blur visibility. Despite high uncertainty about the consequences of the invasion of Ukraine, in terms of growth and inflation, the Fed is clearly returning to promoting price stability – one of its fundamental mandates.
This rate hike should not surprise the markets, which are expecting between six and seven hikes in 2022. However, we are not entering a bullish cycle that could unfold over several years. Investors understand that these will be tactical hikes linked to spiking inflation. The markets also anticipate rate cuts in 2024, in the face of a growing probability of the US economy entering a recession in the medium term.
After the European Central Bank's speech on 10 March, the Fed's announcements should mark a return to fundamentals for central banks. Faced with price shocks – which affect society’s most vulnerable and, importantly, can be a destabilising factor for democracies – central banks consider the fight against inflation to be essential for promoting political stability.
Investing involves risk. The value of an investment and the income from it will fluctuate and investors may not get back the principal invested. Investing in the bond market is subject to risks, including market, interest rate, issuer, credit, inflation risk, and liquidity risk. The value of most bonds and bond strategies are impacted by changes in interest rates. Bond prices will normally decline as interest rates rise. The impact may be greater with longer-duration bonds. Past performance is not indicative of future performance. This is a marketing communication. It is for informational purposes only. This document does not constitute investment advice or a recommendation to buy, sell or hold any security and shall not be deemed an offer to sell or a solicitation of an offer to buy any security.
The views and opinions expressed herein, which are subject to change without notice, are those of the issuer or its affiliated companies at the time of publication. Certain data used are derived from various sources believed to be reliable, but the accuracy or completeness of the data is not guaranteed and no liability is assumed for any direct or consequential losses arising from their use. The duplication, publication, extraction or transmission of the contents, irrespective of the form, is not permitted.
This material has not been reviewed by any regulatory authorities. In mainland China, it is for Qualified Domestic Institutional Investors scheme pursuant to applicable rules and regulations and is for information purpose only. This document does not constitute a public offer by virtue of Act Number 26.831 of the Argentine Republic and General Resolution No. 622/2013 of the NSC. This communication’s sole purpose is to inform and does not under any circumstance constitute promotion or publicity of Allianz Global Investors products and/or services in Colombia or to Colombian residents pursuant to part 4 of Decree 2555 of 2010. This communication does not in any way aim to directly or indirectly initiate the purchase of a product or the provision of a service offered by Allianz Global Investors. Via reception of his document, each resident in Colombia acknowledges and accepts to have contacted Allianz Global Investors via their own initiative and that the communication under no circumstances does not arise from any promotional or marketing activities carried out by Allianz Global Investors. Colombian residents accept that accessing any type of social network page of Allianz Global Investors is done under their own responsibility and initiative and are aware that they may access specific information on the products and services of Allianz Global Investors. This communication is strictly private and confidential and may not be reproduced. This communication does not constitute a public offer of securities in Colombia pursuant to the public offer regulation set forth in Decree 2555 of 2010. This communication and the information provided herein should not be considered a solicitation or an offer by Allianz Global Investors or its affiliates to provide any financial products in Brazil, Panama, Peru, and Uruguay. In Australia, this material is presented by Allianz Global Investors Asia Pacific Limited (“AllianzGI AP”) and is intended for the use of investment consultants and other institutional/professional investors only, and is not directed to the public or individual retail investors. AllianzGI AP is not licensed to provide financial services to retail clients in Australia. AllianzGI AP is exempt from the requirement to hold an Australian Foreign Financial Service License under the Corporations Act 2001 (Cth) pursuant to ASIC Class Order (CO 03/1103) with respect to the provision of financial services to wholesale clients only. AllianzGI AP is licensed and regulated by Hong Kong Securities and Futures Commission under Hong Kong laws, which differ from Australian laws.
This document is being distributed by the following Allianz Global Investors companies: Allianz Global Investors U.S. LLC, an investment adviser registered with the U.S. Securities and Exchange Commission; Allianz Global Investors Distributors LLC, distributor registered with FINRA, is affiliated with Allianz Global Investors U.S. LLC; Allianz Global Investors GmbH, an investment company in Germany, authorized by the Internal German Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Allianz Global Investors (Schweiz) AG; in HK, by Allianz Global Investors Asia Pacific Ltd., licensed by the Hong Kong Securities and Futures Commission; ; in Singapore, by Allianz Global Investors Singapore Ltd., regulated by the Monetary Authority of Singapore [Company Registration No. 199907169Z]; in Japan, by Allianz Global Investors Japan Co., Ltd., registered in Japan as a Financial Instruments Business Operator [Registered No. The Director of Kanto Local Finance Bureau (Financial Instruments Business Operator), No. 424], Member of Japan Investment Advisers Association, the Investment Trust Association, Japan and Type II Financial Instruments Firms Association; in Taiwan, by Allianz Global Investors Taiwan Ltd., licensed by Financial Supervisory Commission in Taiwan; and in Indonesia, by PT. Allianz Global Investors Asset Management Indonesia licensed by Indonesia Financial Services Authority (OJK).
Franck Dixmier is Global Chief Investment Officer (CIO) Fixed Income and a Managing Director with Allianz Global Investors. In this capacity, he leads and oversees the development of the firm’s Fixed Income capability and investment offering. He is a member of AllianzGI’s Investment Executive Committee and International Management Group.
Look for active opportunities following the Fed’s hawkish move
The US Federal Reserve has raised its benchmark interest rate against a backdrop of high inflation and concerns about the geopolitical situation stemming from events in Ukraine. While markets have previously taken rate-hike cycles in their stride, this time could be different, as the Fed seems to be more hawkish than initially expected. Investors should actively seek out relative-return opportunities.
The move by the US Federal Reserve to raise its benchmark interest rate by 25 basis points was no surprise, but it comes amid the most challenging environment of any cycle kick-off since the mid-1980s
Our base-case view is for a steady tightening of monetary policy by the Fed until broader financial conditions have reached a sufficiently restrictive level to tackle medium-term upside risks to inflation
This environment calls for a cautious approach by investors, as we potentially enter a period of broad-based disappointing asset returns
Identifying the increasing number of relative-return opportunities, rather than “buying the dips”, will be key for active investors