The US Federal Reserve (Fed) upped interest rates by 25 basis points to 5 to 5.25% last night, taking the base rate to its highest level since September 2007 and making this the most aggressive set of increases since the 1980s. However, experts expect this to be the final rise in the current hiking cycle and markets are already pricing in falls towards the end of the year.
The rate hike comes despite unrest in the US banking sector towards the end of March, when the failures of Silicon Valley Bank and Signature Bank in the US, as well as Credit Suisse in Europe, caused uncertainty.
Many analysts expected the move as central banks around the world continue to walk a tightrope of managing high inflation without damaging financial stability or stymying relatively weak economic growth.
Yet it is likely to be the end of the cycle, with the Fed hitting the pause button to allow for the impact of the new monetary policy to take effect.
Gerrit Smit, manager of the Stonehage Fleming Global Best Ideas Equity fund, said: “We believe the Federal Reserve’s tightening task is now possibly done. The Fed has material dry powder it can use to good effect when the economy may later on need some stimulus.”
Fed chair Jerome Powell pointed to modest economic growth and tighter credit conditions for businesses and households as reasons for caution, and hinted at pausing the hiking cycle next month, although he stopped short of suggesting rate cuts.
Greg Wilensky, head of US fixed income at Janus Henderson, said: “The Fed chair didn’t definitively shut the door on the potential for future hikes. Nonetheless, we think the most likely outcome following this meeting is that the Fed pauses here.”
Meanwhile, Charles Hepworth, investment director at GAM Investments, noted that the omission of previous language around future hikes was “what the markets were largely praying for”, even if Powell “left the door ajar just enough to allow for additional rises based on data dependency”.
“Not that anyone believes the central bank would,” he concluded.
Eyes have already started to turn to the second half of the year, where the market is pricing in cuts of up to 0.75 percentage points, Hepworth said.
“While Powell et al may want to glide along on pause for a while yet in their battle against inflation, what goes up inevitably must come down,” he added.
“He may find that an accelerating deterioration in the economic landscape will see the Fed having to become very data dependent indeed.”
Joost van Leenders, senior investment strategist at Van Lanschot Kempen, added that markets expect the first cut in September, just four months after the most recent hike, but said that this is “very unlikely given the high level of inflation and the tight labour market”.
“Growth would have to deteriorate very rapidly or a financial crisis would have to develop for the Fed to pivot so quickly,” he claimed.
Preston Caldwell, chief US economist at Morningstar Research Services, suggested the first rate cut will be in December, but that it will be done “aggressively”. By the end of next year, the base rate will be around 2%, he suggested.
But not everyone is convinced that the US central bank will stop now, let alone reverse the hikes by the end of the year.
Seema Shah, chief global strategist at Principal Asset Management, said: “Perhaps there’s still one more to go. With housing activity showing tentative signs of recovery, unemployment stuck near record lows and, most importantly, inflation decelerating so slowly that it may plateau at an elevated level in the coming months, Powell has kept the door slightly ajar for another hike.”