02 February 2023
If you are covering the Federal Reserve’s decision to raise interest rates by 25bps, please find below a comment from Richard Carter, head of fixed interest research at Quilter Cheviot:
“The first rate rise of 2023 in the US sees a return to a more normal outcome, with rates raised by a quarter of a percentage point to 4.5%-4.75% instead of the 50bps we have become accustomed to. Investors should not confuse this as the end of the rate hiking cycle, instead a pause for breath as the Federal Reserve looks to continue to fight inflation, while also assessing if further hikes are the way to go. The economy has been fairly resilient and the consumer remains in okay shape. Recession could be avoided as a result, but this means we need to prepare for the Fed to continue raising rates for as long as inflation remains elevated. The last thing it wants to do is take its foot off the gas too early and stoke a new inflationary cycle.
“Furthermore, even if we are coming to an end of the interest rate rises, one should not assume that this will be followed by interest rate cuts. While inflation shot up to historic levels, it is going to fall at a much slower pace and as such any cut in interest rates may not materialise until the end of the year or potentially in 2024. As a result, markets will continue to be on edge as every move by the Fed is overanalysed for clues about future direction. Despite the rally we have seen in markets during January, volatility will be ever present until we get that certainty about the economy and the impact of higher interest rates for longer.”
