The US Federal Reserve sets the benchmark interest rate for the world’s largest economy. Its decisions drive bond yields, the dollar and the valuation of every risk asset.
Present situation
October inflation came in above expectations on Tuesday, while a December rate hike was already largely anticipated. A few hours earlier, Governor Waller warned that he would consider a 50 basis point hike if inflation came in higher than expected. That scenario remains a minority view, but if upcoming data confirm a very strong labor market and excessive inflation, the decision could be close. After pausing in October, the Fed appears to have waited too long.
Opportunity analysis
A central bank that is seen as behind the curve tends to tighten more than initially expected, which raises discount rates and pressures richly valued growth stocks, long duration bonds and non yielding assets such as gold and crypto. Conversely, cash and short term bonds become more attractive, and companies with pricing power and low debt are better placed. Points to watch: November inflation and employment data, Fed communication before the December meeting and the yield curve.
Investor outlook: Negative
Monetary policy is turning into a headwind for risk assets. Favor quality balance sheets, pricing power and short duration until inflation shows convincing signs of easing.
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