The Strategist

A year later

In the fight against high inflation, the Federal Reserve launched an aggressive tightening cycle a year ago. Since then, price growth has slowed, but inflation remains well above the central bank’s target.

Thomas Wille
Reading time
10 minutes
Surreal picture, man on stairs.
© shutterstock

In May 2022, the Federal Reserve (Fed) had to hike interest rates by more than 25 basis points for the first time in over 22 years, as the US inflation rate had risen rapidly. It was the first of four rate hikes of 75 basis points each - a pace of rate hikes that was unimaginable to most market participants just a few years ago. The rest is history. The Fed had to adopt the fastest and steepest rate hike cycle to get a grip on the inflation rate of almost 10% - a value we immediately associate with the Volcker era. Where are we a year later?

Central bank hiking cycle

A year ago, the two major central banks - the Fed and the European Central Bank (ECB) - were only at the beginning of their tightening cycle. There was great uncertainty about the steepness of the rate path and the number of interest rate steps. One year later, the situation is quite different, as the Fed is likely to have approached the end of its hiking cycle. The ECB is expected to take two to three more steps, which market participants are already anticipating and pricing in. The headwind should thus be a thing of the past.

Inflation dynamics

A year ago, inflation broke out of the disinflationary comfort zone and rose sharply to over 8% on both sides of the Atlantic. A year later, we are past the highs (US: 9.1%, Eurozone: 10.6%) but still far from the Fed and ECB target of 2%. The big unknown remains how quickly the core rate will start to fall and how sticky it is. For the moment, the direction (lower) is more important to investors than the level (high).

Economic growth

A year ago, the economic outlook was already set for a downturn, but the main scenario was a softlanding or low growth. Today, the market expects zero growth or even a mild recession in the US. Should the Fed have to leave interest rates at the current level for longer, the potential for disappointment would be lower.

What is AI?

The topic of artificial intelligence (AI) has been around for a few years, but until a year ago it was of little interest to investors. Nobody really knew who the big players were, and which industries would be affected. Today we know that anyone can be impacted, and that US big tech is once again in the spotlight. After the launch of ChatGPT by the company OpenAI in collaboration with Microsoft, a veritable avalanche was unleashed. Today it is a strong driver for various indices.

Rest of the world and AI

Uncertainties have steadily decreased in recent months. From a fundamental perspective, we continue to favour the rest of the world over the US in equities due to attractive valuations. In the medium to long-term, we maintain our positive view on AI, but in the short-term, risk management should not be neglected in this volatile area.

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