After a two-day meeting, this week the Federal Open Market Committee voted to raise the federal funds rate to a new target range, despite the banking turmoil.
The US Federal Reserve continued to tighten monetary policy this week even as financial markets were jittery about the collapse of Silicon Valley Bank and worries about the banking system, as it attempted to squash inflation out of the system.
Under the move, the benchmark interest rate was raised another quarter of a percentage point to a range of 4.75 per cent to 5 per cent – the US central bank's ninth consecutive raise and the highest rate since 2007.
However, the rise was less than the half-point increase that some had expected before the banking turmoil. It follows a hike by the European Central Bank last week. The Swiss national bank also raised its benchmark interest rate on Thursday by 50 basis points, saying that additional rate rises could not be ruled out. It also said that the measures to support Credit Suisse had "put a halt to the crisis." Yesterday, the UK central bank, the Bank of England, raised rates by 0.25 percentage points to 4.24 per cent.
In a statement, the Fed said that the impact of the banking crisis was “uncertain” but inflation “remains elevated.” Fed chair Jerome Powell said that the tightening in credit conditions caused by the stress in the banking sector could potentially mean fewer rate hikes than anticipated only two weeks ago.
Here are some reactions from investment managers to the hike.
Daniele Antonucci, chief economist and macro
strategist, Quintet Private Bank (parent of Brown
“The Fed raised interest rates by a quarter percentage point as expected, but hinted at a possible pause in the tightening cycle due to rising banking sector stress. Nevertheless, “some additional policy firming may be appropriate” as inflation remains far above target, and the majority of policymakers still see the Fed Funds rate at 5.1 per cent by year end,” Antonucci said.
“Treasury yields resumed their descent following the announcement, with the policy-sensitive two-year yield falling 25 bps at some point. The dollar weakened substantially against the euro, likely due to a growing policy differential, while US equities reacted positively,” he continued. “Bond volatility also surged to levels last seen during the global financial crisis, while the VIX index – a measure of equity volatility – remained relatively calmer. Unsurprisingly, bank stocks bore the brunt of the selloff in equities, with smaller and regional banks in particular facing questions regarding the liquidity position,” he said.
“We also think that more rate hikes are necessary if inflation is to return to the Fed’s 2 per cent target in the medium term, though the financial tightening caused by the recent stress probably reduces the urgency and magnitude of further rate increases, meaning that the Fed may adopt a ‘wait-and-see’ approach for the coming meetings,” he added.
Toby Sturgeon, global head of fiduciary investment
services at wealth planning firm ZEDRA
“The FOMC unanimously voted to raise rates by 25 bps, whilst widely anticipated, yields fell, the US dollar weakened significantly and the Nasdaq rose strongly. Ahead of the meeting, it was felt that the FOMC faced its most challenging policy decision in recent memory given recent bank distress which has left markets nervous as this will clearly have a disinflationary effect,” Sturgeon said.
“Inflation in the US remains at a four-decade high which is higher than in any other US banking crisis of the past 140 years which saw the Fed walking a fine line to balance the two. Prior to the collapse of SVB many had expected a 50 bp hike but most revised this expectation down to 25 bps and a dovish 25 bp at that, so the announcement was widely expected,” he continued. “The new hike-and-see approach from the Fed was sufficiently vague and open to interpretation by stating that some additional policy firming may be appropriate rather than the previous line of ongoing increases,” he said.
Paul McSheaffrey, partner in financial services, China,
“The 25 bps increase in the Fed rate shows a balance between the continuing concerns on inflation and on the stability of the US banking system. I would expect HK dollar rates to largely follow the US dollar rates and the current increasing rate cycle will continue to be positive for HK banks with increasing net interest margin. At least one further rate increase is expected – this will be driven by inflation in the US,” he said.
Christian Scherrmann, US economist at asset manager
“As we expected, the Fed raised interest rates by another 25 basis points despite the lingering uncertainties surrounding financial stability. At the same time, central bankers indicated that the rate-hike cycle might soon come to an end. The statement now tells that “some additional policy firming” instead of “ongoing increases” may be appropriate,” he said.
“Central bankers also did not increase their median expectations on the terminal rate in 2023 but indicated to keep rates a bit higher thereafter. Overall, it seems like past headwinds from financial conditions eventually turned to tailwinds. How supportive these tailwinds will be, however, remains uncertain for the time being,” he continued.