The Federal Reserve increased US interest rates by 25 basis points on Wednesday taking the range to 5.25%-5.50% – the highest it has been in more than two decades.
Central banks around the world have been wrestling with persistently high inflation, but there are signs that in the US the Fed is winning the battle.
Earlier this month, headline US inflation came in at 3%, beating consensus expectations of 3.1%. Core inflation was recorded at 4.8%, falling from 5.3% last month, the lowest since November 2021.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “The Federal Reserve has used the luxury it has to raise its target rate by another 25 bps to a two-decade record.
"US inflation is well under control, but the monetary body nevertheless opted for building more reserves for when it may need to stimulate the economy later on."
Analysts are mixed, however, on whether this will be the last rate hike in the cycle, or if there are more to come.
Gurpreet Gill, macro strategist of global fixed income at Goldman Sachs Asset Management, said: “Paradoxically, today’s Fed meeting was one of the most certain and uncertain of the cycle. A 0.25 percentage point rate hike was fully priced in and widely expected by forecasters and investors. However, investors remain divided on whether this marks the last increase in the current tightening campaign.”
Any signs of renewed inflation could extend the rate-hiking cycle, he argued, and Daniele Antonucci, chief investment officer at Quintet Private Bank, suggested the central bank could have one more rate hike left in it.
“Despite the positive market reaction to falling headline inflation, the fight is not won yet, but we believe we’re entering the final round. We expect the Fed likely has one rate increase left, or perhaps it won’t even have to raise rates any further,” he said.
Paul Jackson, global head of asset allocation research at Invesco, noted that there could be clues in the accompanying statement released by the Federal Open Market Committee (FOMC), which was little changed from the previous meeting.
The statement suggested that inflation remained elevated despite coming down nearer the 2% target, and remained firm that key economic data will continue to drive future policy decisions.
However, Jackson noted that market expectations about future rate decisions are little changed by the announcement, with Fed Funds futures continuing to suggest little likelihood of any further increase in policy rates, while the first rate cut could come as early as March of 2024.
“Looking ahead, we think it likely that the Fed is close to ending the tightening cycle and we expect policy rates to be reduced throughout 2024, though yesterday’s policy statement weakens that
All eyes turn to the Bank of England
The UK central bank will announce its policy decision next week after raising rates by 50 basis points at the most recent meeting.
Jackson said it faces “a much tougher job” as inflation remains higher domestically than across the pond, and has “acknowledged that a recession may be necessary to make meaningful headway in bringing down inflation”. He expected rates to peak in the UK at 6%.
David Henry, investment manager at Quilter Cheviot, added that the latest Fed rate hike “poses a dilemma for the likes of the Bank of England (BofE) and European Central Bank” which are “much further behind in the battle against inflation”.
“They would love to have luxury that the Fed has in declaring the job nearly done, but instead talk is of rates of 6% if not more, depending on what the data says,” he said.
“As a result, we have entered a period of bifurcation in developed economies’ central bank policies and the effects of this could be great. There is a chance the US begins talking about rate cuts before the BofE has had a chance to pause and assess the impact of its actions, and this would have a significant impact on stock and bond prices on both sides of the Atlantic.”