Following last night’s news that the US Federal Reserve Bank (the Fed) had increased base rates by 0.25%, investment experts and economists have been sharing their thoughts as to the implications of this with IFA Magazine – particularly relevant at the moment considering the banking stresses which are clearly spooking the markets at the moment.
You can read our experts selected comments on the Fed announcement below:
George Lagarias, chief economist at Mazars Wealth Management is worried about potential trouble ahead as he comments:
“The Fed acted as was expected and hiked by 0.25%, despite the recent turmoil in the banking system. However, this was a “dovish” hike. The US rate-setting body acknowledged that the recent volatility will tighten conditions further removing the need for further aggressive action. Markets read this as a “pause” or a “near-pause” and reacted positively. The Fed continues to walk a tightrope, balancing the need to stabilise the financial system and the need to regain credibility as an inflation fighter. Despite the initial positive reaction by markets, the fact is that the interest rate is at 5%, an area where financial accidents tend to happen. Conditions could well remain tight until the end of the year, despite investors’ expectations for a quick rate de-escalation. This could mean more volatility, and possibly risk more “things breaking”. We feel that the Fed’s focus on inflation-fighting may be further challenged in the months ahead, as tight monetary conditions continue to reveal the chinks in the armour of the global economy.“
Luke Bartholomew, senior economist, abrdn said: “In hiking rates, the Fed is trying to signal that it remains deeply committed to price stability, and that it believes it has the necessary tools to deal with financial stability issues without jeopardising its inflation mandate. This is a very tight rope to walk, and it is clear the market thinks that policy will soon have to turn easier in response to future economic and financial market stresses.
“We think the Fed will continue to push up rates over the next few months, but as economic strains build, it will be harder and harder for the Fed to maintain that monetary policy and financial stability are two entirely separate domains of policy.”
Anna Stupnytska, Global Economist at Fidelity International said: “The Fed hiked 25bp in its March meeting, which must have been an exceptionally challenging policy decision in light of the ongoing banking turmoil. The decision to go ahead with a hike is a signal of the Fed’s confidence in its ability to contain financial instability while at the same time keeping sharp focus on taming inflation.
“The Fed is following the ECB’s template – hiking while switching to a more cautious meeting-by-meeting approach. The Fed could have paused using ongoing stress in the banking system as a valid reason to take some time out. But that could potentially put the Fed’s commitment to taming inflation in question and damage its credibility, a risk the FOMC participants decided not to take at this point. Instead, the key risk for the Fed now is that this hike proves counterproductive, further exacerbating concerns about financial instability and fuelling market turmoil.
“As the crisis in the banking system continues to unfold, we believe the likelihood of a hard landing scenario – our base case for some time – has risen dramatically in recent days. The current market stress, a symptom of the size and speed of policy tightening to date, is feeding wider spill overs through the bank lending channel to the real economy.
“The Fed’s reaction function remains the crucial determinant of the path from here. Any signs of easing inflation pressures and cooling labour market constraints in coming weeks would be the Fed’s saving grace, allowing them to execute the long-awaited pivot and signal the end of the cycle. If inflation remains hot, the Fed will likely attempt to continue the policy of tool separation in order to juggle both price stability and financial stability, trying to convince markets there is no trade-off between them. But given the role of markets and sentiment in policy transmission, this trade-off is alive and well, and if it gets even sharper, markets will test the Fed until it blinks – and finally exercises the ‘Fed put’.
“We still favour a cautious stance expressed through an underweight to credit and an overweight to cash. The end of the Fed’s tightening cycle is drawing near, and we are mindful that this has the potential to cause a relief rally in risk assets in the near term. However, we believe that the significant amount of tightening already enacted, slowing growth, high inflation, and now the stresses in the banking sector warrant a defensive approach. We still broadly favour EM over DM, although tightening lending standards in the US and Europe are a headwind for EM FX. The China reopening story is still intact, meaning China could be a useful diversifier if DM growth stalls or banking stresses intensify.”
