With much debate about whether the Fed would or wouldn’t hike base rates given the latest banking sector concerns, the decision to hike clearly has implications for the health of US and global economies – as well as wealth managers. Commenting on yesterday’s FOMC decision, experts share their views and opinions further down.
The Federal Reserve has announced another 0.25% hike bringing the interest rate to the highest since September 2007. This move may be the last rate hike of the current cycle but it is still makes this the most aggressive rate hiking campaign since the 1980s.
The decision will have been carefully weighed as on the one hand recent economic data suggests that inflation remains elevated, particularly in the services sector, which needed to be slowed. But front of mind will have been the fact the US banking system has experienced significant turbulence in recent months, with four banks collapsing since early March.
The Federal Reserve raised interest rates in March amidst the uncertainty surrounding the failures of Silicon Valley Bank and Signature Bank and JPMorgan’s recent acquisition of First Republic has brought a sense of relief to the banking sector but the risks may not entirely be in the rear view mirror so opting to continue rate hikes will have been carefully considered. Banks are still grappling with losses on long-term securities, which could affect their lending decisions and force them to be cautious over the next few weeks.
Regardless of the Fed’s future moves, it is clear that the current tightening cycle has exposed vulnerabilities in both the financial markets and the economy. With the latest rate hike, the central bank aims to strike a balance between managing inflation, ensuring financial stability, and responding to the evolving economic landscape. Future policy decisions will depend on the resilience of the US economy and the effectiveness of these rate hikes in addressing inflationary pressures.
Luke Bartholomew, senior economist, abrdn, said:
“The Fed’s hike today was widely expected, so the most interesting aspect of today’s decision was always going to be what the Fed said about the likely future path of rates. In removing language from its statement that pointed to more hikes ahead, the Fed is pointing to a likely pause in rates at the current level. A pause makes sense as the Fed tries to assess the impact of its tightening on credit conditions on the one hand, against the risk that inflation will stay too high on the other.
“We think the most likely move after this pause is that the Fed cuts rates later this year. There is certainly a risk that persistently strong inflation data will force the Fed to push rates higher later this year. But we think the economy is heading into a recession, and this will ultimately see the Fed deliver a significant easing cycle.”
John Leiper, Chief Investment Officer at Titan Asset Management, comments on the FOMC press conference and said:
“Jerome Powel was asked a question on the rate cuts priced in by financial markets later this year. Jerome Powell didn’t hear the question and asked the journalist to repeat. Following that, he didn’t answer the question, prompting the journalist to ask again. He went on to reconfirm his view that inflation will naturally moderate, and in that environment, it would not be appropriate to cut rates. He then went on to clarify the scenarios under which it would be appropriate to continue to hike rates.
To me, that speaks volumes, runs against the grain, and it sets the scene for an overdue pick-up in market volatility later this year. Jerome Powell stated that the Fed has raised rates by 5%, is shrinking the balance sheet and now credit conditions are tightening.To me, that succinctly summarises the significant headwinds facing markets later this year.”
When asked about the recent banking sector turmoil, Jerome Powell stated that there were three large banks impacted and that First Republic draws a line under that period of financial stress. It seems Jerome Powell is continuing to play the ‘idiosyncratic risk’ playbook.
That is increasingly at odds with the evolving narrative and the clear and rising systemic risks impacting the financial system given the Fed has raised rates by 5%, is shrinking the balance sheet and credit conditions are tightening. In my opinion, this is the beginning, not the end, of this period of financial stress.”
Daniele Antonucci of Quintet, has also commented on the Fed decision, stating “A token of conviction.”