The FED: Bang on expectations

Key takeaways

  • The Federal Reserve raised interest rates by 50-basis points, its largest single increase in more than 20 years.
  • The Fed said Russia’s invasion of Ukraine and related events are creating additional upward pressure on inflation and are likely to weigh on economic activity.
  • The decision was unanimous among the voting members of the FOMC.
The United States Federal Reserve building in Washington, DC.

The FOMC just delivered its first 50-basis point hike in a generation, a widely expected move and the second of a projected series of interest rate increases that aim to tame stickier than expected inflation. 

While there were calls for a bolder move – St Louis Fed President James Bullard argued for a 75 basis point hike – consensus within the Fed and in financial markets pointed to 50 basis points for a number of reasons. These include the attempt to avoid a “hard landing” for the US economy, the potential to retain optionality if inflation continues to strengthen, and the contextual increase in quantitative tightening (from approximately 75 to 95 billion), which further drains liquidity from the system. 

Some market commentators argued that we have reached “peak policy uncertainty,” meaning that the Federal Reserve has finally regained considerable inflation-fighting credibility – after its projections consistently undershot actual inflation for almost a year – and does not need to shock on the upside with its tightening trajectory to effectively curb inflation. 

Michael Weisz, Yieldstreet’s founder and President, commented: “The S&P 500 is down more than 13% year-to-date and down about 1% since May last year. Some of the hottest stocks – especially in the growth space – are down more than 50% from their highs. While rate hikes, supply chain issues, the Russian invasion of Ukraine, and high inflation may have been contributing to volatility, timing public markets is a futile – and at times costly – exercise. 

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On the optimal portfolio allocation, he added that “…a public-only strategy doesn’t work anymore. Diversifying your portfolio through sizable alternatives allocation is imperative, just ask endowments, pensions, and institutions that are already doing it. I believe investors should have a minimum of 20% of their assets allocated to alternative investments, and plan to get to 50%, which – by the way – would still be below some of the above-mentioned institutional players. The features of alternative investments can protect investors from making bad decisions – such as for instance, panic selling. Investing in leading managers in private equity and credit, real estate, venture capital, and crypto will provide strong diversification, passive income, and asset appreciation.”

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