- Investors expect the Fed to start raising interest rates this year to fight inflation.
- But Wall Street companies differ on the exact timing and direction of these increases.
- The best strategists also share the impact of rate hikes on your personal investments.
As the new year begins, all eyes remain focused on the
Inflation hit 40-year highs last November, and it continues to be one of the biggest risks to the markets in 2022. That’s why investors are carefully examining the actions of the Federal Open Market Committee at the looking for clues as to how he plans to tackle high inflation.
It all comes down to how the Fed adjusts the fed funds rate – the rate at which banks charge each other for overnight loans – to keep the U.S. economy in tune. The Fed must maintain a delicate balance, as changing the federal funds rate affects money supply, interest rates and inflation.
In times of economic downturn, such as the induced pandemic
Spring 2020, the Fed cuts rates to make borrowing cheaper and encourage spending in an effort to spur economic growth. This, however, can lead to high inflation rates – and that is exactly where the economy is today.
When inflation is too high, the Fed raises interest rates to increase the cost of borrowing. In turn, this should slow growth because consumers spend less and save more money, thus reducing the overall supply of money in circulation.
This is exactly the action most professional investors believe the Fed will take this year.
“2022 will likely mark the start of a new cycle of Fed hikes, ending a more than two-year period of zero interest rate policy,” David Kostin and his team at Goldman Sachs wrote in a note. recent. This succinctly sums up the sentiment of most Wall Street companies, including many strategists who think it may be too little, too late.
âThe Fed has apparently just woken up to inflationary pressures weighing on the US economy,â said Seema Shah, chief strategist at Principal Global Investors. And while other developed central banks are poised to raise interest rates sharply, the Federal Reserve appears to be more tolerant of inflation, even though the Fed has “belatedly recognized the risks of inflation,” said Jean Boivin , director of the BlackRock Investment Institute.
What impact does this have on your investments?
When the Fed raises interest rates, the overall cost of credit in the economy rises, which has far-reaching implications for various financial sectors.
Real estate – the crown jewel of investing in 2020 – will certainly be hit.
According to data from Freddie Mac, as mortgage rates fell to their lowest level on record in the past two years, mortgage refinancing activity reached its highest level since 2003, with $ 2.6 trillion in Inflation-adjusted refinancing in 2020. Activity in the Real estate market also skyrocketed in 2021, with US home sales expected to hit their highest levels in 15 years and home prices reaching a near increase. 20% year over year.
But as rates rise, mortgage interest payments will also rise, helping to cool the boiling real estate market. Higher interest rates on other loans like credit cards, student loans, and auto loans will also hurt consumers.
Rate hikes can also threaten the stock market. Higher interest rates make the cost of doing business more expensive for companies, which in turn can reduce profit margins and profits.
But Wall Street strategists are divided over the repercussions.
âRising rates alone are not bad for stocks,â said Savita Subramanian, Bank of America strategist.
According to FactSet, of the four Fed rate hikes over the past three decades, the S&P 500 fell an average of 1.8% in the first three months after the hike. But six months later, it has regained an average of 4.6% and after 12 months, an average of 7.7%.
“The upcoming rate hikes will not derail the
, but historical experience during Fed tightening cycles suggests that further expansion in valuations is unlikely, “Kostin said.” The trajectory of multiples has fluctuated beyond the six-month mark, stressing the importance of the length and magnitude of the tightening cycle. “
Indeed, stocks rose 6% after the 1999 rate hikes, then plunged when the dot-com bubble burst the following year, with the S&P 500 losing nearly 50% between its 1999 high and 2002 low. .
On a positive note, rate hikes mean consumers can earn higher interest rates on their savings accounts, prompting more people to deposit money into their accounts and grow their savings. personal.
While the Fed is widely expected to start raising rates later this year, Wall Street banks are divided on the exact timing and direction. Below is a summary of the 2022 rate hike forecasts for nine major Wall Street companies, along with comments from each.