Fed: A more-but-less approach

Please note: The article does not constitute advice or any form of investment recommendation. All numbers quoted were sourced from Bloomberg data as at Wednesday 1 February 2023. Past performance is never a guarantee of future performance.

In a much-anticipated move, the US Federal Reserve (Fed) yesterday opted to hike rates by 0.25%, taking the federal funds rate to a range of 4.5%-4.75%. It was the eighth consecutive rate increase.

The decision confirmed the central bank’s desire for higher rates, for longer. However, it also paves the way for smaller hikes in 2023 compared to last year, as signs emerge of cooling US price pressures. By comparison, the December hike was 0.50%, and in November it was 0.75%. 

While the Fed is now undoubtedly entering the last stage of the fastest pace of hikes since 1980, its official statement acknowledged that inflation remains elevated. 

There is still some uncertainty over the ultimate (rate) peak, or terminal rate, but expectations have diminished of late - broad consensus now points to 5% by March.  

Communication under scrutiny

In the aftermath of a torrid 2022, investors will be relieved that the Fed sees enough positive inflation data coming through to have eased off the rate hiking accelerator. 

Such was the predictability of yesterday’s 25-basis point hike – see our earlier US inflation cools article - that more attention was paid to the surrounding communication, than to the hike itself. 

On that point, the Fed’s official statement used the word “increases¹” when looking ahead to future rate decision-making – a significant plural that caught investor attention. The implication being that two, or maybe more, hikes are still on the cards was also re-iterated during the press conference. 

Chair Powell’s tone at the press conference was cautious, as he acknowledged the challenges that lie ahead: “We’ve raised rates four and a half percentage points, and we’re talking about a couple of more rate hikes to get to that level we think is appropriately restrictive. Why do we think that’s probably necessary? We think because inflation is still running very hot¹.”

In an attempt to temper excessive investor optimism, he also added: “It would be very premature to declare victory, or to think that we’ve really got this¹.”

A sign of things to come?

The early economic signs in 2023 are encouraging and a less aggressive interest rate environment looks probable. 

Further rate hikes – at least in the first half of the year – are to be expected. However, global headwinds are expected to blow a little lighter in the coming months, and the Fed appears to have done most of the heavy lifting in its battle to curtail entrenched domestic inflation. 

As Powell said at the post conference: “My base case is that there will be positive growth this year¹.” 

Please note: Market Perspectives returns on the 6 February 2023.

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