Monetary Policy

The Federal Reserve minutes for meetings held on the 3-4th May were released last night, and for markets that have been beaten up by rates volatility, they provided some interesting takeaways.

With investors having endured a painful period of rising yields in 2022, Mark Holman looks at whether rates weakness or credit spread widening has been most to blame.

The broad-based sell-off that has faced investors since the start of this year has been all the more painful because of the breakdown in traditional correlations, which has put conventional hiding places out of reach.

Since the end of last year, central bank officials have been falling over themselves to increase their hawkishness around rates, particularly in the US. Even the ECB Governing Council members have been vocal of late.

With inflation running at 40-year highs in many parts of the world, it is easy to get carried away with making comparisons to the dark economic days of the early 1980s. 

As this remarkable cycle rapidly progresses, thoughts have more recently turned to the chances of a US recession in 2023, and whether the Fed can somehow pull off a soft landing.

Growth in 2022 is likely to be above historical averages for most developed economies, even after adjusting forecasts for the impact of the Russian invasion.

Last week both the Fed and the BoE hiked rates by 0.25%, and judging by the Fed's dot plots and comments from the Bank of England (BoE), more hikes will likely follow in the coming months.

Officially the Fed pivoted from its ‘transitory’ inflation rhetoric in December last year.

The hawkishness of the Fed on Wednesday paved the way for the Bank of England (BoE) to follow suit.

The much-anticipated March FOMC meeting is finally upon us, and given there was no meeting in February investors will be very glad of this window into the Fed’s thinking, particularly given the ongoing and far-reaching economic ramifications of Russia’s invasion of Ukraine.

We think a base case that central banks will follow a more measured monetary policy path than markets are currently pricing in is reasonable given the current backdrop.