Rising inflation and expected weak economic data from the US have pushed the US Federal Reserve to continue its hawkish guidance. The recent US Fed rate hike of 75 bps is the third consecutive increase.

“We expect a Fed monetary policy-induced recession, and that the Fed will only ease after a recession has occurred,” said Ray Sharma-Ong, Investment Director, Multi-Asset Investment Solutions, at Abrdn.

The investment management firm does not see the Fed rate hike slowing in the near term and cites the three conditions placed by Fed chair Jerome Powell — below-trend growth, softening labour market conditions, and inflation moving to 2%.

Additionally, Abrdn says that a soft landing of the US economy has now decreased and predicts that key interest rates may cross 5%. On US Treasuries, the asset management firm sees US 19-year yields possibly pushing towards 3.75%-4%. It also expects equity markets to remain under pressure while the US dollar is likely to continue its rally.

Aggressive US Fed tightening unlikely to end

Asset management firms are eyeing US inflation data closely. Tai Hui, Chief Market Strategist at JPMorgan Asset Management said that the Federal Open Market Committee (FOMC) is ‘highly attentive’ to taming inflation that is running well above 2%.

However, the Chief Market Strategist said that a soft landing of the US economy is possible as there is strong job growth and persistent excess demand for labour. Hui cites the August CPI report saying that interest rates will have a more hawkish path.

In the short term, JPMorgan sees a challenging outlook for equities, whereas high-quality intermediate to long duration core bond will be more attractive.

The investment management firm sees the Fed rate hike to keep pressure on risk assets in the near term, specifically export-oriented companies. US dollar strength is likely to persist, while Asian central banks may hike rates further to stem outflows from Asian currencies.

US inflation in focus with Fed rate hike

Spanish firm Mapfre Asset Management has a similar take on the US Fed rate hike, and its Chief Economist Alberto Matellán said that the 75-bps hike was expected, and aggressive hikes are necessary.

“That’s because they have to fight inflation first, before trying to kickstart the economy, so they must reach their terminal rate as quickly as possible. This way they will have the chance to lower rates later, and the impact can be felt earlier,” says Matellán.

The MAPFRE economist adds that the US needs to cut liquidity drastically and it needs to slow the pace of GDP to bring inflation down. However, the question remains whether the aggressive stance of the US Fed will bring down inflation to 2% without triggering a recession.

Jonathan Boyar, Principal Advisor to MAPFRE AM Forgotten US Value Fund, says that investors should focus on fundamentals and valuations instead of guessing the Fed’s next move. “We think investors owning a portfolio of undervalued stocks that have catalysts for capital appreciation…will do quite well over the next 2-3 years,” says Boyar.