27 July 2023
If you are covering the Federal Reserve’s decision to raise interest rates by 25 basis points, please find below a comment from David Henry, investment manager at Quilter Cheviot:
“As they clearly stated in the lead up to this decision, the Federal Reserve has chosen to raise rates for the 11th time out of 12 opportunities. Markets will be pleading that this is the last of the rate rises in the US, especially as it appears we have entered a period of disinflation and hopes of returning to the 2% target this year become more realistic. The US economy has been incredibly resilient in the face of these interest rates, but the effects of all these rises is beginning to take effect, with borrowing costs now seen as restrictive enough to bring inflation down without tipping the wider economy into recession.
“The Fed now has until September before deciding if it needs to raise rates again. There is a fear that core inflation may remain persistent in its slow march downwards and this could cause them to act once more, but they will be very conscious not to overtighten and have a policy misstep. Markets are now extremely sensitive to commentary emerging from central banks, so the communications will need to be crystal clear of what the criteria is for a further rate rise. Ultimately, it will continue to say that all options are on the table to give itself the flexibility to raise rates again should the data disappoint.
“This also poses a dilemma for the likes of the Bank of England and European Central Bank. They are much further behind in the battle against inflation and are facing a set of circumstances that are unique to those regions. They would love to have luxury that the Fed has in declaring the job nearly done, but instead talk is of rates of 6%, if not more depending on what the data says. As a result, we have entered a period of bifurcation in developed economies’ central bank policies and the effects of this could be great. There is a chance the US begins talking about rate cuts before the BoE has had a chance to pause and assess the impact of its actions, and this would have a significant impact on stock and bond prices on both sides of the Atlantic.”
