Mohit Oberoi
As expected, the ECB (European Central Bank) raised its policy rates by 75 basis points. While such rate hikes are usually the exception, in the developed economies, they have almost become a norm over the last few months and even the Fed is expected to raise rates by 75 basis points at its next meeting.
The ECB’s policy rate was -0.50% before it raised rates by 50 basis points. Now, it has followed up with a 75-basis point rate hike. ECB chief Christine Lagarde said, “We expect to raise interest rates further, because inflation remains far too high and is likely to stay above our target for an extended period.” She signaled that the rate hikes would continue into 2023 as well.
Even the Fed started with a 25-basis point rate hike in March. It raised rates by 50 basis points in May. In June and July, Fed chair Jerome Powell raised rates by 75 basis points. The current monetary policy tightening by the US Central Bank is the most aggressive since the 1980s. However, even US inflation is at the highest level since then.
US inflation did fall to 8.5% in July on an annualized basis. Also, July’s inflation was flat on a month-on-month basis. Many had started to believe that the Fed would soon pivot from rate hikes to rate cuts.
Jerome Powell Dashed Pivot Hopes at Jackson Hole Symposium
However, Powell dashed those hopes at the Jackson Hole Symposium last month. At the Symposium, Powell said, that this is “no place to stop or pause.” Powell added, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses.”
Powell termed these “the unfortunate costs of reducing inflation,” adding “But a failure to restore price stability would mean far greater pain.” Meanwhile, traders are now betting on a 75-basis point rate hike at the Fed’s meeting later this month.
Where to Invest During Rising Inflation?
Rising inflation has been a worry for central banks, governments, consumers, as well as investors. A lot of consumers are facing trouble in meeting their monthly expenditures. While US wage growth has been strong, it has trailed inflation. Also, the inflation rate has been even higher for food, fuel, and rent, which is making things tougher for many low- and middle-income households.
Growth stocks have especially seen a massive sell-off amid higher inflation. While inflation in general is negative for stocks, some investing strategies can do well in inflation.
Cathie Wood Believes Fed Would Pivot Soon
While the Fed has made it amply clear that it is not looking at a pivot anytime soon, Cathie Wood of ARK Invest believes that the US Central Bank would start cutting rates in the next three to six months.
She tweeted, “The Fed seems to responding to COVID-related supply shocks spanning 15 months the same way that Volcker battled inflation that had been brewing and building for 15 years…. Powell is using Volcker’s sledgehammer and, I believe, making a mistake.”
Wood has been warning of deflation for a long. While her funds outperformed the markets in 2020, they are underperforming badly in 2022. Wood has added more shares of Nvidia and Teladoc Health. However, amid the crash in growth stocks, her bets have not paid off much.
After a strong 2020 and 2021, the US IPO market has also been virtually dead this year. However, there are ways through which you can invest in pre-IPO companies.
Fed Rate Hikes Are Raising Inflation Fears
US stocks have fallen in 2022 amid high inflation and Fed’s rate hikes. Morgan Stanley analyst Mike Wilson believes that the S&P 500 could fall to 3,400 in the fourth quarter, which is below its June low of 3,666. Notably, Wilson hasn’t accounted for a recession in his forecast and predicts the S&P 500 falling to 3,000 in case the US economy goes into a recession.
The US economy contracted in the first and second quarters of 2022. However, the NBER (National Bureau of Economic Research), which officially declares a recession in the US, looks at several other indicators, including personal expenditure and employment.
The Fed has warned that its rate hikes might lead to a US recession but has clarified that it is not trying to enforce a recession.
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This article was written for Business 2 Community by Mohit Oberoi.
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