Weekly Market Update- Week Ending 09/12/2022

It’s been a mixed week for investment markets as investors await key policy decisions due shortly.

Both the Federal Reserve (Fed) and Bank of England (BoE) meet next week to discuss monetary policy. First up on Wednesday, the Fed will reveal its interest rate decision. Interest rates in the States, having started the year at zero, currently sit at 3.75% to 4%. With four consecutive 0.75% rises, the pace of increase this time is expected to slow, with the market anticipating a 0.5% rise.

The Fed has a tightrope to walk in the coming period. If they over-tighten monetary policy by continuing to increase interest rates, the anticipated depth and length of any resultant recession could be significant. On the other hand, if interest rates are not raised sufficiently to bring inflation back towards the 2% target, the Fed risks undoing all their hard work, committing a policy error, and potentially having to start raising rates again.

The Fed still believe there is a path towards a ‘soft landing,’ with unemployment rising enough to put downward pressure on wage inflation and economic growth slowing (or falling slightly) but without causing a harsh recession.

On Thursday, the BoE will make its announcement, a rise of 0.5% to 3.5% is expected. With inflation in the UK sitting at 11.1% in October (a 41-year high), the bank still believes that further increases are required to regain control and bring the rate down.

John Naylor, Chartered FCSI – Head of Investment Committee