The US Federal Reserve’s 25bps rate rise announced last night has been widely seen as the last of this cycle.
Jerome Powell and his Federal Reserve Open Market Committee colleagues shifted the US base rate up to a target range of 5.25% to 5.5% at its July meeting. This represents the highest level in 22 years.
There remains some concern around the tightness of the American labour market, but that is not sufficient to convince many observers that further rate rises will be warranted.
Inflation is falling fast in the US, with the last annualised CPI reading revealed earlier this month being just 3%, versus a target of 2%.
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Jack McIntyre, portfolio manager at Brandywine Global, commented: “This hike was probably one of the more well-telegraphed FOMC moves in the past year. The Fed was expected to tighten by 25bps, and they did just that. It was a ‘nothingburger’, but that isn’t a bad thing since it gives the Fed plenty of time to analyse a host of future economic data until its next meeting at the end of September.”
“In the meantime, watch the Employment Cost Index, which Powell singled out. That could be the next market-moving data point, and it’s due on Friday.”
Preston Caldwell, chief US economist at Morningstar, added: “We expect [last night’s] meeting to be the Fed’s final rate hike. Even with economic growth showing no signs, yet, of slowing to the below-trend growth rate usually needed to cause broad-based disinflationary pressure in the economy, inflation is nevertheless showing signs of abating due to relaxing of supply side constraints. As such, we expect the Fed to pause on rate hikes in its final three meetings of 2023.”
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“Moreover, we continue to think that contracting bank lending and more cautious household spending will slow GDP growth in the second half of 2023 and first of 2024. Combined with ongoing easing of the supply side, this will push inflation to around 2% in the second half of the year.
David Henry, investment manager at Quilter Cheviot, is also among those that expects the rise to be the last.
“As they clearly stated in the lead up to this decision, the Federal Reserve has chosen to raise rates for the 11thtime out of 12 opportunities,” he said. “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.”
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