Stocktake: Bloodied markets are braced for more big rate hikes

Unconvincing, grudging, dovish – not words you might expect to be used following the biggest US interest rate hike in 28 years. Nevertheless, BlueBay Asset Management’s Timothy Ash wasn’t impressed by the Federal Reserve’s 0.75 percentage point hike, and he’s not alone in saying the Fed remains behind the curve.

Billionaire hedge fund manager Bill Ackman said increases of a full percentage point at the Fed’s June and July meetings would have been better. Jeffrey Gundlach, the so-called bond king, went further, calling for a massive hike of two percentage points.

The recent shock US inflation figures, which rocked global markets, mean the Fed has no choice but to be hawkish. Still, there is the worry that it continues to underestimate the problem, with Fed chief Jerome Powell now saying he expects a “softish” landing.

That looks optimistic. Last week, almost 70 per cent of economists polled by the Financial Times said a US recession is coming in 2023. The Fed needs a “whatever it takes” message to tame inflation, says Ash, a take that is increasingly echoed by strategists.

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Unfortunately, this may spell further trouble for bloodied stock markets. During the last eight bear markets, notes Pension Partners’ Charlie Bilello, the Fed responded with easy money “every single time”. Now, the opposite is true. Powell must play catch-up, meaning investors must grapple with a hawkish Fed during a bear market for the first time since Paul Volcker’s unremitting inflation-busting efforts in the early 1980s.