Fed turns off autopilot on rate hikes – but has it reached cruising altitude?
After raising rates as expected at its May meeting, it looks like Federal Reserve policy will become more data driven and event-dependent as it softens on future hikes.
The US Federal Reserve (Fed) raised rates by 25 basis points to take the Fed funds policy rate to a range of 5 to 5.25% in line with market expectations.
But the key change came in the official policy statement, in which the Fed dropped the phrase “the committee anticipates some additional policy firming may be appropriate”. It now says “in determining the extent to which additional policy firming may be appropriate…the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments”.
Going forward it looks like policy will become more data-driven and will depend on how events unfold.
So, the Fed is turning off the rate hike autopilot, but has cruising altitude been reached as far as rates are concerned?
Clearly, this will now depend on the growth and inflation figures, particularly the latter. However, an insight into the Fed’s thinking was provided by chair Powell in his post-meeting press conference, where he said that he believed that the level of interest rates was now restrictive at around 2% in real terms.
Add on ongoing asset sales (quantitative tightening) and the additional tightening of credit conditions as a result of recent events in the banking sector, and he believed that policy was now tight.
Inflation is still currently too high and the labour market needs to slacken, but this suggests Powell is comfortable with waiting for the lags from policy to work their way through to the economy. On this basis the bar for further rate hikes has become higher.
Our view is that we will now have seen the peak in rates and that the next move will be down. But we do need to see the modest slowdown year to date turn into something more dramatic to create meaningful slack in the economy and return inflation to target.
Chair Powell refused to be drawn on the debt ceiling debate saying it was not important to today’s decision. However he did acknowledge that it was discussed as an adverse risk to the outlook.
This document is issued by Schroder Investment Management Australia Limited (ABN 22 000 443 274, AFSL 226473) (Schroders). It is intended solely for wholesale clients (as defined under the Corporations Act 2001 (Cth)) and is not suitable for distribution to retail clients. This document does not contain and should not be taken as containing any financial product advice or financial product recommendations. This document does not take into consideration any recipient’s objectives, financial situation or needs. Before making any decision relating to a Schroders fund, you should obtain and read a copy of the product disclosure statement available at www.schroders.com.au or other relevant disclosure document for that fund and consider the appropriateness of the fund to your objectives, financial situation and needs. You should also refer to the target market determination for the fund at www.schroders.com.au. All investments carry risk, and the repayment of capital and performance in any of the funds named in this document are not guaranteed by Schroders or any company in the Schroders Group. The material contained in this document is not intended to provide, and should not be relied on for accounting, legal or tax advice. Schroders does not give any warranty as to the accuracy, reliability or completeness of information which is contained in this document. To the maximum extent permitted by law, Schroders, every company in the Schroders plc group, and their respective directors, officers, employees, consultants and agents exclude all liability (however arising) for any direct or indirect loss or damage that may be suffered by the recipient or any other person in connection with this document. Opinions, estimates and projections contained in this document reflect the opinions of the authors as at the date of this document and are subject to change without notice. “Forward-looking” information, such as forecasts or projections, are not guarantees of any future performance and there is no assurance that any forecast or projection will be realised. Past performance is not a reliable indicator of future performance. All references to securities, sectors, regions and/or countries are made for illustrative purposes only and are not to be construed as recommendations to buy, sell or hold. Telephone calls and other electronic communications with Schroders representatives may be recorded.