Monetary Policy

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.

Escalating geopolitical tensions have contributed to a volatile past week for investors, but uncertainty regarding central bank action continues to dominate the bond markets, with one investment bank now predicting nine straight hikes from the Fed beginning at its March meeting.  

Yield curve shape and yield curve change are often good predictors of the state of the economy and its outlook.

As 2021 wore on we became increasingly concerned that the disconnect between asset prices, economic fundamentals and monetary policy was becoming more acute.

Last week investors were faced with a double whammy of monetary tightening from the Bank of England (BoE), which on Thursday hiked interest rates by 25bp and announced the gradual unwind of its £20bn corporate bond portfolio.

For fixed income investors, the start to 2022 has been trickier than any we have experienced for many years, but we think this difficulty is to be expected and aligns with our macro view.