SNAPSHOT2 min read

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.

04/05/2023
Washington

Authors

Keith Wade
Chief Economist & Strategist

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.

Important Information: This communication is marketing material. The views and opinions contained herein are those of the author(s) on this page, and may not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. This material is intended to be for information purposes only and is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. It is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a reliable indicator of future results. The value of an investment can go down as well as up and is not guaranteed. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Schroders does not warrant its completeness or accuracy. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Schroders has to its customers under any regulatory system. Regions/ sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this material include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change. The content is issued by Schroder Investment Management Limited, 1 London Wall Place, London EC2Y 5AU. Registered No. 1893220 England. Authorised and regulated by the Financial Conduct Authority.

Authors

Keith Wade
Chief Economist & Strategist

Topics

Follow us

To facilitate legibility, the language forms male, female and diverse (m/f/d) are not used simultaneously in this text. All references to persons apply equally to all genders.

Schroder Investment Management (Switzerland) AG (herein after called "SIMSAG") webpages are aimed exclusively at qualified investors with their registered office or residence in Switzerland. The SIMSAG webpage also contains information about collective investment schemes which are not approved for distribution to non-qualified investors in Switzerland.

For illustrative purposes only and does not constitute a recommendation to invest in the above-mentioned security / sector / country.