Investors Adjust After Tightened Monetary Policy, Some Expect Steeper Path Ahead: Reuters

The United States Federal Reserve approved its first interest rate hike, 0.25% or 25 basis points since 2018, aiming to address increasing inflation without affecting economic growth.

But hiking rates could crimp growth and tip the economy into recession, Reuters analyst notes. Still, Fed Chair Jerome Powell expressed confidence that the economy could flourish despite the less accommodative policy. 

"The Fed (is) trying to right the ship," said Andy Kapyrin, chief investment officer of RegentAtlantic. "My expectation is that they will get more hawkish as the year goes on, especially if inflation stays high."

As per a Reuters report, Kapyrin is increasing overweights in comparatively cheap stocks, economically sensitive companies that tend to thrive in solid growth and higher rates. He also expects floating-rate bonds to benefit from rising borrowing costs.

Still, the clarity on the Fed's projected rate hike path and the central bank's insistence that the economy is strong enough reassured some. The benchmark S&P 500 closed up more than 2%, which some investors took as a relief that the Fed has pitched in initiatives to tackle the inflation.

Some concerns over future growth were apparent in the Treasury market, with yields on some shorter-dated Treasuries rising above longer-dated ones, a sign that investors see economic risks ahead.

Fed policymakers began to discount the global economy's new risks, marking down their gross domestic product growth estimate for 2022 to 2.8%, from the 4% projected in December.

"They don't have a great record in engineering 'soft landings," said Matthew Nest, global head of active fixed income at State Street Global Advisors, who expects the economy to shrink in 1H of 2023.

Some relief is expected if commodity prices ease, said Tony Rodriguez, head of fixed income strategy at asset manager Nuveen. He is moving into low-quality mortgage bonds and high-yield corporate bonds, which could take pressure off the Fed to tighten rates as much as it has projected.