Christmas is around the corner, but it seems, for now, that a pause in interest rate rises is not yet upon us. We remain in a configuration we have not seen for decades: a slowdown in the world economy engineered by central banks to combat inflation. The intensity and duration of this central bank tightening phase depends of course on the speed of disinflation and this was echoed on Wednesday by the US Federal Reserve (Fed) Chairman Jerome Powell.
During his speech where he raised interest rates by an expected 0.5%, Powell certainly held firm in his stance of managing market expectations of a much anticipated “pivot” from raising interest rates to starting to consider a cut. He warned investors that “it will take substantially more evidence to give confidence that inflation is on a sustained downward path”. At least we have now made a start.
Historically there is a lag of five months between a peak in the rate of CPI inflation and the last Fed rate hike. In the autumn we started to see some tentative signs appearing that the labour market is softening, which should herald the deceleration in wages into 2023 which the Fed wants to see.
The “inflation peak” has probably been hit, which should allow a less rapid pace of rate hikes next year. The Bank of England joined in with a further 0.5% rate hike yesterday, with Governor Andrew Bailey joining Powell in confirming a “forceful policy response” will be stuck to. When the European Central Bank joined in later in the day, the market recovery once again stuttered.
The impact of 2022 will be felt for many years to come, with a seismic shift in monetary policy and, once more, war returning to Europe. The move from monetary support to one of tightening to tame inflation remains the financial story for 2023, as it has been throughout 2022.
We had our Christmas lunch on Wednesday and it was very heartening to have all our staff together for the first time in three years, due to previous COVID cancellations. A Christmas gathering is as important here as it is at home, an opportunity to catch up with colleagues, review the year gone by, but most importantly to prepare for the one ahead. During our lunch we once again remembered Queen Elizabeth II and it seems apt to sign off my weekly emails for the year in her memory. Speaking during the initial onset of COVID in 2020, she said “When life seems hard, the courageous do not lie down and accept defeat; instead, they are more determined to struggle for a better future.” Investment markets have not been kind this year, however, we prepare for 2023 with steadfast confidence in better times ahead and we look forward to sharing those with you, our trusted clients.
Thank you for your patience and fortitude, may we wish you a Merry Christmas and, let us hope, a Prosperous New Year. I look forward to writing you again on 6th January 2023.