11 January 2022
Interest rate hike
Last week saw US technology stocks slump, after a better-than-expected jobs report bolstered expectations that the US Federal Reserve will raise interest rates in 2022.
The central bank released the minutes from its latest meeting on Wednesday last week – disclosing that officials are considering increasing interest rates sooner than investors were expecting, in order to tackle high levels of inflation. The minutes revealed that some officials believe rates should be raised ahead of the Federal Reserve meeting its goal of hitting maximum employment in the US.
The inflation effect
Ever since the coronavirus pandemic caused the shutdown of global economies, central banks have maintained stable asset prices thanks to low interest rates and other forms of support (for example, bond purchases).
That said, inflation is now growing, and so many of them have made moves to withdraw this support. The result is that some corners of the market – such as in the share prices of technology companies – are already feeling the effects.
Mark Dowding of BlueBay Asset Management, a fund manager for St. James’s Place, observes that actions such as the Federal Reserve’s impending interest rate hikes cue a shift in economic conditions – following a period in which central banks have comprehensively supported markets.
“In many respects, 2022 begins with a sense of optimism after two years of the pandemic. As normality returns, we are inclined to think that fundamentals and valuations will play a more important role in determining the path of asset prices than they have during a period characterised by abundant liquidity and market technicals.”
From pandemic to endemic?
The latest media reports indicate that the UK is moving towards ‘living with’ COVID-19 due to signs that Omicron is less severe than previous variants, and therefore brings with it a ‘new normal’.
However, the ongoing economic uncertainty suggests that investors would be wise to take a long-term view with a broad range of investments. The beauty of investing your funds across a host of assets should mean that their performance won’t be solely dependent on any one outcome.