Recently many central banks around the world, such as the Bank of Canada, the Bank of England and the ECB have signaled that they need to combat inflation and begin raising rates sooner than expected. This has caused short term interest rates to rise accordingly. However, at the same time we’ve seen longer term 10-year and 30-year yields coming down. This could be partially due to the slow down of economic data we saw in Q3. However, it also may suggest that the markets believe that central banks will be making a policy error raising interest rates too soon and, in turn being the primary driver causing the economy to slow down.
This week the Federal Open Market Committee meets, where it is expected they will announce the start of tapering of their current $120 billion bond purchases per month. Markets are expecting a tapering of $15 billion per month. Just a couple of months ago the markets were anticipating no interest rate hikes until 2023. Now the markets are pricing in two to three rates hike in 2022.
How should investors interpret this data? Is the Fed going to make a policy mistake and raise interest rates too quickly?
Our belief is that investors should position their portfolios for interest rates to rise but still believe that the Fed will be very diligent when it comes to raising interest rates. Yes, one of the main priorities of the Fed is keep inflation in check. However, the current inflation we are seeing is almost primarily driven by supply side shocks. Let’s use the notable semi-conductor shortages as an example. Is the Fed raising interest rates going to have any impact on the supply of semi-conductors coming from Taiwan? Not at all. So, we still believe that the Fed will careful to not derail the economic recovery too much as inflation will begin to level off over the next year.
If you would like to know how we are positioned in our portfolios or would like a complimentary portfolio review contact us AskFreedom@freedomfamilyoffice.com.