Following the news from the US FOMC that the Fed will be keeping interest rates in the 5.00 to 5.25% range, as well as the latest inflation data which showed that US inflation in May was down to 4%, the lowest level since April 2021, Investment Experts have been sharing their reaction to the news with us as follows:
Salman Ahmed, Global Head of Macro and Strategic Asset Allocation at Fidelity International comments: “As expected, the Fed took a pause from tightening its monetary policy further in their latest meeting. However, the strong message was that more tightening lies ahead as indicated by the move-up in the 2023 dot plot, and was confirmed by Chair Powell during the press conference. The policy emphasis remains on price stability and the ongoing resilience in the labour market continues to be seen as driver of persistence in inflation. With additional hikes predicted, the FOMC maintains its higher for longer policy stance, believing it will put downward pressure on price pressures.
“All in all, we maintain our view a recession is likely in late 2023 or early 2024, as the tight policy starts to damage the economy going forward. The transmission lags in this cycle have been long and variable due to the COVID shock, however, the continued focus on keeping monetary policy tight means risk to growth remains firmly to the downside as we move further into 2023.”
Following the Fed meeting, James McCann, deputy chief economist, abrdn, said: “The Fed took a breather at its meeting , breaking a run of 10 consecutive rate hikes which have pushed the Fed Funds Rate 500bps higher since the start of last year. Clearly there is a desire to see how the tightening delivered is affecting growth and inflation, especially given uncertainty over how aggressively and quickly this will bite.
“However, updated interest rate forecasts from the FOMC today have pencilled in another 50bps of rate hikes this year, meaning this pause might prove short lived. Indeed, absent some deterioration in activity, or a clearer deceleration in underlying inflation, it seems likely that the Fed will be back to tightening in July, or latest September.”
Susannah Streeter, head of money and markets, Hargreaves Lansdown comments: ‘’The Fed has paused for breath but signalled the inflationary fight is still not over and more punishing rate hikes could be on the way. Investors had expected policymakers to keep rates on hold, but the more hawkish tone came as some surprise, with two extra hikes pencilled in by half of the officials sitting on the committee. There are three outlier views suggesting an even tougher stance might be needed to take down inflation closer to target. While the Fed insists future decisions will be driven by further data, it seems policymakers are expecting further economic snapshots to show that inflation is remaining stubborn. The new dot plot sparked a sell off on stocks on Wall Street with recent high enthusiasm ebbing away as investors assess plenty of hurdles ahead before the chance of rate cuts finally appears on the horizon in 2024. The sterner take on the situation facing the Fed is likely to increase bets that the Bank of England will increase rates not just next week, but multiple more times before the end of the year. Inflation is still the ogre looming over investor sentiment and that’s unlikely to change until the rate of price increases retreats much more quickly.’’
David Henry, investment manager at Quilter Cheviot said: “For the first time in well over a year, the Federal Reserve has held interest rates at their current level. While not usually a significant event, this one feels especially so. After all the hikes in the last 15 months and the various supply chain shocks, the tide is finally turning in the battle against inflation.
“But victory is not being declared yet. The Fed has made it clear all along that it is responding to the data and core inflation remains well above target. This pause is very much the Fed in wait and see mode – it will still be looking for its action to date to take effect in the economy, and thus won’t want to slam the brakes on too hard. On the flipside, however, we can’t expect a pivot to rate cuts anytime soon either, and instead rate rises are still on the table for the next meeting.
“Markets will continue to second guess what the Fed will do, and this will only add to the volatility we have seen for the past 18 months. While the end of this hiking cycle is in sight, it doesn’t necessarily mean the difficult conditions for investors will wash away with it. Diversification and focusing on quality businesses continues to be the key as earnings get challenged and consumer spending potentially sours.”
