At 1.8%, inflation is where the Fed wants it to be, having marginally come off the 2% figure seen in recent months. The slight fall doesn’t mask the fact that inflation has been increasing over the course of the year, in the face or three interest rate hikes so far, with a fourth all but certain at the December meeting.
Sentiment and jobs figures have remained strong, while wage growth has picked up, so the Fed is going to need to keep raising rates to keep a lid on inflation. Despite a more dovish Fed next year and Powell’s comments yesterday, we think markets pricing in only one rate increase, on top of the December hike, is too low. A December hike would leave interest rates at the very lower bound of what members consider neutral, so the comments yesterday imply more watchfulness as opposed to plans to limit hikes, retreating from October comments that rates are “a long way from neutral’’.
With markets already pricing in too few rate rises, and US 10 Year yields back down near 3%, investors should be wary of adding duration to their portfolios just yet. Bonds are still expensive, although the recent widening of credit spreads means that we prefer corporates over government bonds.
James Rowlinson is head of Fund Selection at Mazars