The United States Federal Reserve System (Fed) raised its key interest rate by 25 basis points, from a target range of zero to 0.25 per cent, to a range of 0.25 per cent to 0.5 per cent. That officially ended the era of zero interest rates, in place since March 2020 as the monetary authority kept the cost of capital cheap to bolster an economy that was being ravaged by the Covid-19 pandemic. With inflationary pressure seething in the US, the Fed envisages a total of seven rate increases this year, followed by another four next year, taking the Fed funds rate to 1.9 per cent by the end of 2022 and 2.8 per cent by the end of 2023. Here are what global banks and analysts are saying about the Fed’s move, one of the most anticipated economic events in the world: 1). Rick Rieder, Chief Investment Officer of Global Fixed Income at Blackrock, which has US$2.8 trillion of fixed-income assets under management Today [was the start of] a new era of monetary policy tightening in the United States. Coming exactly one week after the end of the quantitative easing process, the Fed is embarking upon a clear move higher in rates and is signalling future balance sheet reductions (likely beginning sometime in the summer). These policy actions imply a strong directive toward more normalised financial conditions after two years of very easy conditions, in the wake of the Covid pandemic, and indeed can be perceived as more hawkish than anticipated by many. In straddling the line today on policy, this Fed looks clearly undeterred in reaching at least policy neutrality, and indeed potentially policy rate levels beyond that point. That to us should be a given, as it would build in at least some room to adjust policy easier in the future, if necessary, and would not fan further inflationary conditions, so this strikes us as merely table-stakes. Going much further on tightening, including reducing liquidity within the system to any great magnitude, should be accompanied by a much clearer set of conditions on both sides of the line in which the Fed will be having to straddle over the coming months. 2). Jacky Lam, Financial Consultant at Charles Schwab Hong Kong After months of laying the groundwork for a steady and substantial tightening in monetary policy, investors expected the Federal Reserve to raise rates this month. However, the economic outlook for the US has clouded in recent weeks. The subsequent economic sanctions on Russia have caused a surge in commodity prices, due to the prospects of reduced supplies flowing to the markets. The result has seen inflation rise to its highest levels in over 40 years. Although the job market remains very strong, consumer confidence has plummeted, which threatens consumer spending – particularly as wage gains are being offset by surging inflation. Fortunately, the US economy has been growing at a strong pace, which should help soften the blow to economic growth from higher energy costs. Given all these uncertainties, expectations about the path of Fed policy have swung wildly in the past few weeks. Although the Fed would like to pursue a steady path to raising short-term interest rates and reducing its balance sheet, it may not be as easy as they might have expected just a few weeks ago. We think it’s likely that the Fed will move cautiously, with further rate hikes this year. 3). David Chao, Global Market Strategist, Asia Pacific (ex-Japan) at Invesco The FOMC’s projections portray the desire to remove the generous policy support provided since the outbreak of the pandemic, especially since inflation is expected to be higher than previously expected. That is likely to keep treasury yields moving higher, though a flattening of the yield curve is likely to dampen the effect on longer maturities. It would not be a surprise to see 10-year yields above 2.5 per cent during the course of this year. Higher yields may be expected to support the dollar but it has already strengthened over the last year, even more so since Russia’s invasion of Ukraine, and we wouldn’t be surprised to see the greenback consolidate over the rest of the year. US stocks have tended to provide positive returns during Fed tightening cycles and we are reminded that this will be the case this time around. If we believe the FOMC’s GDP growth projections (2.2 per cent and 2.0 per cent in 2023 and 2024, respectively), then we face the prospect of an aggressively tightening Fed and limited profit growth especially give the rise in raw material prices. Hence, we suspect that equity market gains may be limited, especially if it turns out that the Fed is being overly aggressive. Within equities a mild preference for value over growth, and cyclicals over defensives. We also anticipate that alternatives such as real estate and private credit, as well as commodities, should outperform in this environment. 4). Kerry Craig, Global Market Strategist, JPMorgan Asset Management The least interesting thing about today’s rate hike, was today’s rate hike. The committee now anticipates hiking rates seven times this year, and almost half the committee members would like to see more. This is some departure from the three hikes expected back in December, and would push the Fed Funds rate to 2.0 per cent by year end. Moreover, a further four hikes in 2023 could see the Fed Funds rate rise to a level above the Fed’s long run view of where interest rates should be, and put policy firmly into restrictive territory. 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. The 1.6 percentage point increase in their own forecasts for inflation in 2022 is an admission that price pressures are broader than simply the spike in energy price and the disruption to supply chains. These same reasons contribute to the lower growth profile expected this year. It’s noteworthy that even the 2.8 per cent growth now expected is above trend and a positive outcome given the economic challenges. This is a testament to the strength of household and corporate balance sheets and an indicator that the economy is facing an income shock rather than anything else. 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. The very tight labour market indicates the scarcity of additional capacity to deliver upside to growth through an uplift in the supply of labour. This, combined with the waning economic momentum and fiscal tightening next year, could see an unwelcome slowing in the economy in 2023, which becomes more susceptible to even a moderate economic shock. For markets, the rising rate and higher inflation environment mean maintaining moderate underweight to duration in portfolios as we expect bond yields to rise further. Meanwhile, the wide range of possible outcomes to the situation in eastern Europe, and the still supportive elements of corporate earnings within equity markets, mean a more neutral than underweight position in equities. Many equity markets have become more attractively priced as valuations have fallen, but valuation pressures are likely to remain and investors should focus on the ability of earnings to offset this valuation drag. The focus on quality of earnings tilts us towards US equities in the near term. 5). Ellen Gaske, Principal and Lead Economist for the G10 economies on the Global Macroeconomic Research Team at PGIM Fixed Income, and Robert Tipp, Chief Investment Strategist at PGIM Fixed Income The Federal Reserve jumped into its post-pandemic tightening cycle by setting forth an aggressive rate-hiking path in an effort to contain inflation while sustaining the economic expansion. Despite the removal of accommodation amid geopolitical uncertainty, the markets took the Fed’s message largely in stride. Although short term rates rose to reflect the Fed’s steeper expected rate hike path, both inflation expectations and long-term Treasury yields fell, while stocks and credit products rallied, suggesting the markets see the potential for the Fed’s balanced approach to deliver a soft landing.