Yesterday’s decision by the Federal Reserve to raise rates by 75 basis points for a second consecutive time was historic, as it marks the most aggressive back-to-back rate hikes (150 basis points in less than two months) since the early 1980s, before the Fed was formally targeting the fed funds rate as its key policy focus.
The Fed’s statement and press conference yesterday clearly indicated that the Fed is not done with raising rates yet, but gave some of the first indications that they are acknowledging the signs of slowing economic growth and that the lagged effects of the rate hikes to date have not been fully felt yet. Markets reacted favorably to the news (75bps was well anticipated before the meeting), as it brings the potential for smaller rate hikes and the eventual end of the rate hike cycle closer.
Our intermediate-term (3-6 month) indicators have deteriorated enough recently to argue for shifting from overweight equities in our asset allocation framework to neutral. While stocks are still favored over bonds on a longer-term relative valuation basis, the prospect for further consolidation and volatility means that easing back equity exposure and holding somewhat more cash makes sense in our view.