Important information: The value of investments and the income from them, can go down as well as up, so you may get back less than you invest.
STOCK markets have held steady following monetary policy statements in the US last night and in the UK today that provide greater clarity about the outlook for interest rates.
Last night, the Federal Reserve Bank forecast inflation in the US will reach 4.2% in 2021, more than double its target rate, and gave its strongest hints yet that we may be approaching a new era when the US economy is required to stand on its own two feet without extraordinary stimulus measures.
The Fed’s latest “dot plots”, which show rate-setters’ expectations for the future direction of interest rates, indicate there is no clear consensus among policymakers about when interest rates will begin to rise. However, half now believe rates will need to start to increase from their current range of 0% to 0.25% in 2022, a year earlier than previously indicated1.
The Fed also signalled that it may start to reduce its asset purchases as soon as the end of the year if the economy continues to improve at its present pace. The Fed is currently buying at least US$120 billion in bonds and mortgage backed securities every month.
A tapering announcement either in November or soon after that had been widely anticipated. In response to the pandemic crisis, the Fed began supporting the US economy via an asset purchase programme (quantitative easing) last March.
In a separate announcement today, the Bank of England confirmed that UK interest rates would remain at 0.1% and that its asset purchases would continue at their present pace. On inflation, the Bank raised its forecast to 4% for the final quarter of 2021 but reiterated its view that cost pressures won’t last. The Bank gave no additional guidance on when interest rates might be raised2.
Central banks certainly don’t want to upset the applecart by withdrawing stimulus measures and raising interest rates too early. That could risk ending the global economic recovery and still might not solve inflation, especially if, as we have seen in the UK, some consumer price rises have been driven by supply bottlenecks as opposed to excess consumer demand.
Benchmark 10-year government bond yields both in the US and the UK have remained low and below pre-pandemic levels today, at around 1.3% and 0.8% respectively. This suggests a lack of concern that either inflation or interest rates will spiral3.
A future environment of positive economic growth and gradually rising interest rates continues to favour equities over bonds. The Fed’s median forecast for interest rates in the US is now 1.0% for 2023 and 1.8% for 2024, which would represent a more modest tightening compared with previous cycles when rates have been lifted on average by 0.25% each quarter4.
With change in the air stateside, stock markets are likely to continue to display bouts of volatility over the next few months, implying investors may do well to maintain diverse exposures encompassing a variety of asset classes and geographies. The latest Investment Outlook aims to help point you in the right direction.
1 Federal Reserve Bank, 22.09.21
2 Bank of England, 23.09.21
3 Bloomberg, 23.09.21
4 Federal Reserve Bank, 22.09.21
Important information: Investors should note that the views expressed may no longer be current and may have already been acted upon. There is a risk that the issuers of bonds may not be able to repay the money they have borrowed or make interest payments. When interest rates rise, bonds may fall in value. Rising interest rates may cause the value of your investment to fall. Overseas investments will be affected by movements in currency exchange rates. This information is not a personal recommendation for any particular investment. If you are unsure about the suitability of an investment you should speak to a Fidelity adviser or an authorised financial adviser of your choice.
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