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Investment strategy
December 19, 2021
2 mins

Understanding the Fed: What tightening means for portfolios

December 19, 2021
2 mins
David Bailin
Chief Investment Office and Global Head of Investments
Steven Wieting
Chief Investment Strategist & Chief Economist
SUMMARY

The US Federal Reserve has changed its mind in favor of speeding its exit from easing. This presents a favorable gradual return to normal scenario as likely. Combined with expected growth in corporate earnings, we believe the development is constructive for further potential gains in equity prices.


  • The US central bank’s actions and forecasts are most consistent with a view that the pandemic and the government’s discrete policy response will not engender a long-lasting rise in inflation. Monthly gains in goods spending have been diminishing ever since the last wave of stimulus in the first quarter of 2021.
  • In our view, the pace of demand is starting to fall back in line with gains in real personal incomes with no new mass stimulus to come. With slower consumer spending coupled with growing imports and production, supply and demand imbalances will gradually close.
  • The absence of market pressure in long-term yields in the face of the Fed’s tightening campaign is notable. Fed Chairman Jerome Powell remarked that in a low global yield environment, investors are able to take advantage of premium US yields.
  • In response to the latest Fed stance and Powell’s comments, markets have vacillated, with investors unsure of how to position for the changing monetary policy and economic outlook. US equities rallied in relief initially. This followed apprehension over the potential for more hawkish steps. Since last Thursday (December 16), defensive and ;value sectors have outperformed. The bond market initially saw yields move little as the Fed maintained its long-term policy rate forecasts but accelerated the time-table for rate hikes by a few months. The US dollar and commodities saw little net change amid generally increased volatility.
  • Overall, we believe that combined with expected growth in corporate earnings, the current Fed direction is constructive for further potential gains in equity prices and negative real returns in many bonds.

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