The FOMC raised rates for the first time since the pandemic began and delivered a consistently hawkish message at its March meeting. The median forecast rose more than expected to show seven rate hikes in 2022 and a terminal rate above the neutral rate of 2.75%.

Almost half (7 out of 16) of the Committee participants are looking for more than seven hikes this year, a fact that was also highlighted by Chairman Powell;this adds credibility to the idea that at least one 50bp increase is a real possibility later this year. 

On the economic front, Chairman Powell reinforced his hawkish tone by acknowledging the seriousness of the inflationary situation at his press conference and emphasizing the strength of the economy and the labor market in particular, comments that suggest it would take a lot to steer the FOMC away from its path of tightening.

Powell said the FOMC will be "attentive to the risks of further upward pressure on inflation and inflation expectations" and acknowledged that high inflation has spread more broadly in the services sector and that wage growth is running at a pace well above what would be consistent with 2% inflation.

Powell also assessed the risk of recession as "not particularly high," emphasizing that the average GDP growth forecast for 2022 of 2.8% is 1 percentage point above long-term potential. He highlighted the "tremendous momentum" in hiring and pointed to the gap between jobs and workers as evidence that the labor market is "extremely tight."

Regarding balance sheet reduction, the FOMC is now expected to announce its start at its next meeting in May, according to Powell's own suggestion. He also noted that the minutes of this week's meeting, to be released in three weeks, will reveal some of the key parameters of that process, and that it will be faster than the last cycle but otherwise seem "very familiar." This suggests a pace of $60 billion per month for Treasury securities and $40 billion per month for mortgage-backed securities, similar to last time, but at a faster pace.

Market reach and investment recommendation

When balancing the negative aspects (tighter policies and high valuations) with the positive aspects (low risk of recession), investors are advised to maintain a more or less neutral risk exposure. Given valuations and the prospect of rising yields, they should maintain low fixed-income duration and favor value over growth stocks and overweight banks and the energy and commodities sector in general.

Source: Fynsa strategy; Bloomberg

Humberto Mora

Strategy and Investments