The Federal Reserve has hiked US rates for the first time in three years, and it won’t be the last hike this year, predicts the CEO of deVere Group, one of the world’s largest independent financial advisory organisations.
The comments from Nigel Green come as policymakers moved the target range to 3.75% to 4%, a decision markets had priced as better than 90% likely for weeks.
The odds shifted dramatically in a single month: a month ago, traders put the probability of a hike at just 36%.
Chairman Kevin Warsh’s remarks at the Fed’s Jackson Hole symposium helped turn that around, followed by firmer labour data and another round of stubborn inflation numbers. Crude oil back above $100 a barrel, driven by the conflict involving Iran, has added further pressure.
The Fed’s updated economic projections extended its rate forecasts out to 2029 for the first time, a signal in itself about how long this tightening cycle is now expected to run.
He says: “A quarter point today was the easy part. The harder question is what comes after it, and the honest answer is more tightening, not less.
“We believe the Fed delivers a second hike in December, and investors positioning for ‘one and done’ and a return to calm are likely going to be caught out.”
Nigel Green points to Warsh’s reversal since Jackson Hole as the clearest sign of how fast the case for tightening built.
He says: “Warsh spent months resisting the case for a hike, then reversed course within weeks of Jackson Hole.
“This kind of shift does not happen because of one data point. It happens because inflation stopped cooperating and oil put a floor under the numbers the Fed cannot look through.
“Both of those pressures are still building, not fading, which is exactly why we expect another move in December.”
The deVere CEO says investors now need to translate that outlook into specifics, starting with fixed income duration.
“Fixed income duration is where this starts. Anyone holding long-dated bonds bought when yields were low is sitting on paper losses that get worse with every basis point this cycle adds, and a December hike is not fully priced into every part of that curve yet.
“Reviewing duration exposure now, rather than after the next move, is the difference between managing this cycle and being managed by it.”
He adds that currency exposure is the next area investors need to check.
“A Fed that hikes twice in one quarter, with policy projections now stretching out to 2029, gives the dollar support that most global portfolios are not positioned for. Anyone holding unhedged foreign assets priced in dollars, or debt in dollars, should be running the numbers on what a stronger currency does to those positions before December, not after.”
Nigel Green says borrowing costs are the pressure point most households will feel directly.
He says: “Mortgages, corporate refinancing and variable rate business loans all move on the back of this decision, and a second hike in December means that repricing continues rather than settles.
“Businesses and households planning around today’s rate as the peak are building their plans on potentially the wrong assumption.”
The deVere CEO concludes: “Markets can reprice this fast in one direction, and they can reprice this fast in the other.
“The investors who come through this year well are the ones treating every meeting between now and December as live, not the ones assuming today’s decision was the last word.”