SNAPSHOT2 min read

Fed turns off autopilot on rate hikes – but has it reached cruising altitude?

After raising rates as expected at its May 2023 meeting, it looks like Federal Reserve policy will become more data driven and event-dependent as it softens on future hikes.

05/05/2023
Washington

Authors

Keith Wade
Chief Economist & Strategist

The US Federal Reserve (Fed) raised rates by 25 basis points on 3 May 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 Jerome 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 as of May 2023 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 the decision on 3 May 2023. However, he did acknowledge that it was discussed as an adverse risk to the outlook.

Important Information

The contents of this document may not be reproduced or distributed in any manner without prior permission.

This document is intended to be for information purposes only and it is not intended as promotional material in any respect nor is it to be construed as any solicitation and offering to buy or sell any investment products. The views and opinions contained herein are those of the author(s), and do not necessarily represent views expressed or reflected in other Schroders communications, strategies or funds. The material is not intended to provide, and should not be relied on for investment advice or recommendation. Any security(ies) mentioned above is for illustrative purpose only, not a recommendation to invest or divest. Opinions stated are valid as of the date of this document and are subject to change without notice. Information herein and information from third party are believed to be reliable, but Schroder Investment Management (Hong Kong) Limited does not warrant its completeness or accuracy.

Investment involves risks. Past performance and any forecasts are not necessarily a guide to future or likely performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Derivatives carry a high degree of risk. Exchange rate changes may cause the value of the overseas investments to rise or fall. If investment returns are not denominated in HKD/USD, US/HK dollar-based investors are exposed to exchange rate fluctuations. Please refer to the relevant offering document including the risk factors for further details.

This material has not been reviewed by the SFC. Issued by Schroder Investment Management (Hong Kong) Limited.

Authors

Keith Wade
Chief Economist & Strategist

Topics

Follow us

Contact Us

Level 33, Two Pacific Place, 88 Queensway, Hong Kong

(852) 2521 1633

Online enquiry: Please complete the web form below and we will reply as soon as possible.

Contact us

The investments mentioned in this website may not be suitable to all investors. The information contained in this website is provided for reference only and does not constitute any investment advice. Investors are advised to seek independent advice before making any investment decision.

Investment involves risk. Past performance is not indicative of future performance. You should remember that the value of investments can go down as well as up and is not guaranteed. You may not get back the full amount invested. Please refer to the relevant offering document including the risk factors.

This website is intended for Hong Kong residents only. Non-Hong Kong residents are responsible for observing all applicable laws and regulations of their relevant jurisdictions before proceeding to access the information contained herein. Schroder Investment Management (Hong Kong) Limited is regulated by the SFC. The website (excluding Schroder Provident Plan related pages) has not been reviewed by the SFC.

The website is issued by Schroder Investment Management (Hong Kong) Limited.

Important notice: Schroders does not make unsolicited requests through emails, calls, messages, WhatsApp, WeChat, Facebook, Instagram applications. Any contact other than via Schroders’ official channels for personal or financial information is likely to be false and fraudulent. Please stay vigilant and refer to our Fraud Alert Notice for further details. If you have doubts about the person, platforms, websites or institutions that claim to be associated with Schroders, please contact us via (852) 2521 1633 and inform the local police.