NN IP: Fears of a more hawkish Fed

NN IP: Fears of a more hawkish Fed

January 26, 2022

Monetary policy Fed
Federal Reserve Washington.png

Investors’ nerves about the possibility of faster Fed tightening and the prospect of ongoing inflation caused a spike in volatility last week. On Wednesday 26 January (today), the Fed is likely to confirm the market’s expectations that it will embark on faster policy tightening.

It will be important to assess Chair Jerome Powell’s words about inflation risk and the timing of the unwinding of the balance sheet. In his latest houseview, Maarten-Jan Bakkum, Senior Emerging Market Strategist at NN Investment Partners shares his insights at the matter at hand:

“If the Fed were to hint at a potentially more aggressive pace of tightening than the three hikes by the end of the year and the start of the balance sheet unwinding in Q2 that are currently fully priced in, market sentiment would probably worsen. In such a scenario, US bond yields would increase again, putting more pressure on risky assets. But after the Fed’s dramatic hawkish shift over recent months and the aggressive repricing of monetary policy expectations – four additional rate hikes have been priced in for the coming two years since September – a hawkish surprise is not necessarily more likely than a dovish one.”

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