Could interest rates really go beyond ‘neutral’ this year?

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The U.S. CPI bounced to 7.9% in February and is expected to go further up from here in the coming months, which raises a question if the U.S. Fed could really go beyond “neutral” to tame inflation this year.  

Interest rate above 2.50% is a possibility

According to Lafayette College’s Krishna Memani, interest rates above 2.5% by the end of the year is a possibility. This morning on CNBC’s “Squawk Box”, he said:

You can’t say with a great deal of confidence that the Fed won’t go above neutral. Given where inflation is today and what is locked in for near-term future inflation, the likelihood that it goes down meaningfully anytime soon is pretty small. So, they may have to go above neutral.

He sees a continued increase in labour force participation as the only factor that can partially offset some of the Fed aggression.  

Should you own equities in this environment?

Last week, Fed Chair Jerome Powell said he was open to raising rates by more than 25 bps at one or more of the remaining FOMC meetings this year.

His remarks, however, failed to scare investors out of U.S. stocks that have rallied more than 2.0% ever since. Tracie McMillion of Wells Fargo also agrees that equities continue to be a suitable investment in this environment, so long as they’re picked with caution. In a separate CNBC interview, she said:

Historically, SPX tends to be positive 12 months after Fed starts raising rates. But we’re becoming more cautious in holding equities here, which means we are becoming more quality-oriented, moving away from emerging markets and small caps, and into U.S. large and mid-caps.

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