Why Markets Should Ignore the Next Rate Hike and Focus on Guidance
A Julius Baer economic review highlights that anticipated interest rate hikes matter less to markets than forward guidance and inflation projections.
According to an economic review by Alfonso Borges, a senior executive at wealth management bank Julius Baer, historical interest rate hikes have had little impact on markets when they were fully anticipated. The last 20 rate hike days under Janet Yellen and Jerome Powell showed moderate cumulative market responses.
Market Focus and Rate Expectations
Ahead of tomorrow's meeting, investors should focus on forward guidance—specifically the relationship between interest rate projections and inflation forecasts—rather than the widely expected 25 basis point move. The last 20 rate hikes under Yellen and Powell indicate that the size of the move itself matters very little to markets, including the short end of government bond yields. Even 75 basis point hikes left no major mark because they were fully priced in by the time decisions were announced.
"Investors must focus on forward guidance rather than the expected 25 basis point hike," notes Alfonso Borges from Julius Baer.
Historical Yields and Future Policy Shifts
More interestingly, rate hike days were generally moderate in aggregate: US government bond yields for 2-year and 10-year maturities fell by 75 and 82 basis points respectively across the 20 meetings, while the dollar index dropped by 7.4% and gold rose by 10.0%. Changes in 1-year forward OIS rates provided much greater explanatory power, especially for 2-year and 10-year yields.
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Ignore the anticipated 25 basis point rate hike itself.
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Do not assume the historical moderate pattern will repeat under Kevin Warsh.
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Focus heavily on forward guidance and inflation forecast alignment.
