Quick takes: US Federal Reserve hikes interest rates in fight against inflation

THE US Federal Reserve (Fed) on Wednesday (Mar 16) raised interest rates for the first time since 2018, amid economic risks from excessive inflation and the war in Ukraine.

The Fed had announced a quarter percentage point increase in the overnight federal funds rate, lifting that key benchmark from its near-zero level. It also laid out an aggressive plan to push borrowing costs to restrictive levels next year to combat inflation.

Here are some quick takes from market observers and analysts on the rate hike:

Kerry Craig, global market strategist, JPMorgan Asset Management:

• "The increase in the number of rate hikes is a clear indication that the Fed has regained its inflation fighting mojo and wants to maintain its credibility in the face of inflationary pressures."
• "Starting from such a low base, the move higher in interest rates is not a real headwind to the economy and real rates are likely to remain negative for some time. However, if the Fed does deliver on the expectations outlined at today's meeting - a more aggressive path for interest rates and the unwind of its balance sheet at a coming meeting - then the economy looks more vulnerable in 2023."
• "For now, the outlook for the US economy is one of resilience rather than recession and is capable of absorbing the higher interest rates."

Jason Brady, president and chief executive, Thornburg Investment Management:

• "In my opinion, the amount is too small to matter right now, and the amount of the hike is irrelevant."
• "I believe that the Fed's policies will slow the economy, and they'll have to make an excruciating choice between keeping unemployment low or stymying inflation because they are too far behind schedule."
• "Based on the Fed chair Powell's remarks on price stability and unemployment, I think they will tip the scales in favour of price stability."
• "I think the Fed is wrong to think the probability of a recession is low. We are almost certainly coasting in that direction."

Jason England and Daniel Siluk, portfolio managers, Janus Henderson Investors:

• "We believe that every Fed meeting has the potential to be 'live', meaning that a rate hike is possible. While it would likely be well-telegraphed per Powell's modus operandi, we cannot rule out a 50 basis point hike at some point."
• "The forced shift in the Fed's stance, however, means that the period of 'peak policy uncertainty' has likely been extended. Our view is that the Fed will make every attempt to proceed with caution. Yet, this same caution could lead to even more volatility in longer-dated rates as the risk of higher-than-trend inflation becomes fixed in investors' minds."
• "With our expectation that US monetary policy will ultimately prove to be more dovish than many expect, we believe longer-dated bonds remain at risk to continuing inflationary pressure."

Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International:

• "We maintain the expectation of 3 or 4 rounds of rate hikes this year but the ensuing tightening conditions from a very hawkish Fed will damage growth."
• "It appears that the Fed's focus will weigh more on inflation fighting despite the uncertainty created by the situation in Ukraine based on yesterday's meeting. This creates further headwinds for asset markets as the central bank remains further out of money in this cycle. From an asset allocation perspective, we remain cautious on both equities and credit."

Taimur Baig, chief economist, DBS Group Research:

• "We are adjusting our rate expectations; we see the Fed hiking in every meeting this year, which is 6 times, and then 4 more times next year... Given the improved balanced sheet of the households and corporates, we think the US economy is capable of absorbing these hikes."
• "Today's developments have been unsurprising to global markets, which have had to deal with additional developments in Ukraine and China. We will see some headwind materialise for emerging markets from a hawkish Fed, as has already been the case."
• "But most Asian economies have undergone repeated stress tests with capital flow volatility in the past years, and have shown that their relatively improved reserves and external account position can handle episodes of risk on and off. As long as China's macro risks are contained, Asia can navigate the Fed's path."

Singapore research team, Lim & Tan Securities:

• "In view of these rate hikes, we continue to like the Singapore banks as every 1 basis point increase in rates would directly increase their bottom lines."
• "Meanwhile, rate sensitive sectors such as the real estate investment trusts (Reits) will likely continue to underperform or range trade for the time being, and how much a Reit is impacted would depend on the amount and duration of its hedging policies."
• "For the construction sector, there might be some impact on the finance costs, but due to strong demand and higher operating leverage, the eventual increase in revenue and profits should more than offset the increase in interest cost."
• "For the red hot oil and gas and commodities sector, the higher interest rate is likely to impact them and could see gradually waning interest this year."