The FOMC decided on June 15 to raise rates significantly by 0.75%, indicating that it is expected to raise hawkish rates and slow down economic growth in the future. The closerness of the FRB’s assumptions to economic reality has the effect of narrowing the room for market sentiment to be unnecessarily pessimistic and optimistic, while making it more aware of the risks of recession and asset price downturns. Think about the investment landscape that should be newly taken into consideration and the stance that should be taken. (Tanaka Taisuke Research Representative Rakuten Securities Global Macro Advisor Tanaka Taisuke)
Decided to raise interest rate by 0.75%
FOMC sudden change
On June 15, the FOMC (Federal Open Market Committee) decided to raise rates by 0.75%. Only a few days ago, a 0.5% rate hike was the market consensus expectation. Consistent with this sudden change in the authorities, the outlook for the future economy and interest rates has also changed.
This has dramatically transformed the landscape of the economy and markets not only in the United States but around the world. There are both light and dark. Investors will struggle with new policy stances and trial and error to adapt to future trends.
Looking back on the story of the FOMC Sudden Change. The May FOMC minutes suggested a 0.5% rate hike at the June and July meetings, respectively, and Fed Chairman Jerome Powell confirmed this in his remarks.
The monetary tightening, which continued two more 0.5% after the 0.5% rate hike in May, was interpreted as quite hawkish at this point. And, coupled with the assumption that inflation will slow down from the April-June period, the FOMC in September, November, and December raised interest rates by 0.25%, respectively, which gave a sense of relief that the hawkishness would loosen.
Turning to the US stock market, from the beginning of 2022, the Ukrainian contingency struck a chord with the rebellion against the start of a US interest rate hike. The pessimism that will be given later is rampant when the foot is lowered in the middle of May. The argument that the economy is in recession has intensified, and the US long-term interest rate has softened to below 3% due to the sense of risk-off.
The Fed’s optimistic outlook helped save this. Although monetary policy is hawkish for the time being, long-term interest rates have fallen, inviting a recovery in stock prices, given the flexibility to slow inflation and slow the pace of rate hikes three months later. Then, in May, a genkin post-lecture was given that the economy, which factored in the worst risks, was okay.
However, when the sense of risk-off weakens, interest rates tend to rise naturally. When long-term interest rates rose above 3% again, stock prices became nervous between expectations of recovery and slipping trauma.
The hawkish statement that the CPI (Consumer Price Index) announced in June was higher than expected and the ECB (European Central Bank) announced a rate hike in July added to this. The sharp rise in long-term interest rates caused stock prices to plummet, and it was Monday, June 13, before the FOMC, that the year-to-date lows were hit again.
At this point, there were mixed views on whether to raise interest rates by 0.5% in consideration of stock prices and the economy, or by 0.75% after reviewing inflation slowing observations. However, when stock prices stopped declining awaiting the FOMC results the following Tuesday, the market was expected to raise rates by 0.75%.
The Fed is lagging behind the surge in inflation and is accelerating rate hikes. While taking care not to shock the economy and the market, it continues to be prepared to achieve the maximum monetary tightening that the market incorporates. The FOMC on Wednesday, June 15th, decided to realize the 0.75% rate hike that the market has factored in.
This 0.75% rate hike has significantly changed the stance that investors should take in 2011. I will explain the transformation from the next page.
What is your investment stance in 2023, which has changed dramatically with the FOMC “0.75% rate hike”?
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