The Fed ‘pivot’ is dead, says strategist, who shares where to invest right now
The idea that a shift in the Federal Reserve’s hawkish stance on interest rates will benefit equities is false, according to a top strategist at investment management firm Fidelity. “The concept of pivot is dead,” Salman Ahmed, Fidelity’s global head of macro and strategic asset allocation, told CNBC Pro Monday. Fidelity currently has around $3.7 trillion in assets under management. Ahmed said that equities would be unlikely to benefit even if the Federal Reserve stops hiking rates at the current level. “Even if they were to pause, the stance of monetary policy will [still] be hawkish.” The Fed increased its short-term borrowing rate by 0.75 percentage point to a target range of 3.75%-4%, earlier this month, to the highest level since January 2008. This is well beyond its “neutral” 2.5% — the level at which the central bank considers monetary policy no longer easy, but not yet restrictive. Ahmed noted that the market now expects the Fed to hold rates at a much higher rate next year than he predicted a few months ago; according to the CME FedWatch tool, markets are now pricing in a top rate of 4.75-5% by March. Investors have moved on to question whether the Fed might be forced to pivot away from historically high rates, and even start cutting next year, given recession risks. “It’s now about how long the Fed can keep the policy in a very restrictive stance,” Ahmed added. He believes interest rates at such levels risk causing “real damage” to the economy, potentially triggering a rise in unemployment — the ultimate “income shock” for consumers. In such an economic environment, Fidelity is “concerned” about how equities might perform and thinks investors should consider bonds instead. According to Ahmed, government and investment-grade corporate bonds are some of the cheapest asset classes available now that offer risk-free returns. As the Fed has raised rates, the fixed-income market has been one of the only major asset classes to see outflows this year, making bonds the ideal investment when the market begins to turn, according to Ahmed. The iShares U.S. Treasury Bond ETF and the Fidelity Investment Grade Bond ETF have declined by 13.15% and 16.16% this year, respectively. Ahmed says highly rated companies are unlikely to face funding pressures until 2024, thereby removing some of the near-term risks in the corporate bond market. “We think some of the bigger names and companies can withstand recessionary pressures,” he added.
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