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Is the Fed done with rate hikes?

23 March 2023

The US central bank raised rates on Wednesday, but chair Jerome Powell struck a dovish tone for the future.

By Jonathan Jones,

Editor, Trustnet

The Federal Reserve raised interest rates by 25 basis points on Wednesday as it trod a fine line between getting inflation under control and allaying fears that its policies will cause a recession.

This takes interest rates in the US to a range of 4.75 to 5% and was the ninth consecutive increase from the central bank, which has been swift to lift rates post-pandemic.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “Inflation is proving stickier than feared, with core inflation being particularly stubborn. This has caused the Fed to feel it has to continue to act.”

Also needing consideration is the current banking crisis. The demise of Credit Suisse and Silicon Valley Bank are currently idiosyncratic problems, but there are fears that contagion could spread to other financial institutions.

Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas fund, said: “The hike is a relief to the capital markets, confirming the Fed can stay its course of disciplined tightening and that the current banking turmoil is not as restrictive to the US financial system as some may fear.”

Along with the rate hikes, the Federal Reserve also updated its ‘dot plot’, which is a forecast for future rates. Here the average for 2023 remained unchanged at 5 to 5.25%. This would indicate another 25bps of rate hikes this year.

The range of projections has become wider, with one official forecasting a pause after today’s meeting, while another predicted rates would reach 6%, although Fed chair Jerome Powell emphasised these are just projections and not a plan.

“This clearly also brings the hiking process near its closure, with an outlook of more stable US interest rates earlier than many thought. This is a constructive outcome,” said Smit.

Not all analysts were as confident, however.

Writing in response to the latest meeting, Tiffany Wilding, North American economist, and Allison Boxer, economist at PIMCO, noted that Powell “signaled caution” during his speech.

The Fed chair emphasised that ongoing rate hikes are no longer expected, but did not take them completely off the table, noting that they “may” be needed.

Carter added that Powell “is now beginning to act on his warning to congress that interest rates will likely have to go above 5% if inflation does not come down quicker”.

Ashish Shah, chief investment officer of Goldman Sachs’ public investing business, said there was “considerable uncertainty in the path ahead”, adding that future predictions should be downplayed for now.

“Going forward, we expect the Fed’s data-dependent framework to be informed by what happens in both the economy and banking sector. It is easier to separate monetary policy from financial stability objectives during liquidity crises, but concerns over capital constraints can fast change the economic outlook and blur the divide. Rate cuts have become more conceivable, though not yet our base case given the inflation picture.”

Anna Stupnytska, global economist at Fidelity International, was also cautious, suggesting that a hard landing scenario has risen “dramatically” in recent days thanks to the banking crisis.

“The current market stress, a symptom of the size and speed of policy tightening to date, is feeding wider spillovers through the bank lending channel to the real economy.

“We still favour a cautious stance expressed through an underweight to credit and an overweight to cash,” she added.

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