Market reactions to the Fed’s 25-point hike

As analysts expected, the Fed raised interest rates by 25 basis points last night, bringing them to the range of 5.25% and 5.50%, their highest level in 22 years. Thus, the Federal Reserve is back on tightening monetary policy after the June hiatus.

Below, you can see the first reactions of industry experts to this new rate hike.

James McCann, deputy chief economist at abrdn

The Fed is still a long way from declaring victory in its fight against inflation, even if some of the more recent trends in price dynamics have been encouraging. It stuck firmly to the script today, hiking rates by 25bps in a unanimous move, and the press statement continues to signal
that the Fed is still planning to do more at this juncture.
 
We are skeptical and think today’s move will probably be the last of this tightening cycle. The Fed is likely to hold rates steady at its September meeting, consistent with its desire to gather more information on activity and inflation before potentially tightening again. And by the time November rolls around we think a weaker economic backdrop will prevent any further
adjustment.
 
Of course, if the economy remains more resilient in the face of this tightening the central bank
could come back to the table for one or more hikes. A much weaker economic backdrop
likely required to bring inflation sustainably back to target in our view.

Charles Diebel, Head of fixed income MIFL

The federal reserves acted in line with consensus market expectations to raise rates by 25bp at today’s meeting, taking rates to their highest level in 22 years. The statement was close to unchanged from prior meetings with inflation still cited as elevated and that the economy was continuing to expand moderately. However, the focus on the tightening in conditions still ‘in the pipeline’ effectively underlines that they are very much data-dependent from here. The market reaction was very muted and the implication seems to be that at the next meeting, at least a further hike is unlikely but remains possible later in Q4. This should re-enforce the range concept for US treasuries for the summer months at least but may have a marginally negative impact on the USD. At the same time, there is nothing in the statement that will pose a threat to equity markets.

Christian Scherrmann, U.S. Economist at DWS

As expected, the Fed raised interest rates by 25 basis points at its July meeting. The target range for the federal funds rate is now 5.25% to 5.50%, the highest level in 22 years. Minor changes to the press statement and Jerome Powell’s remarks reaffirm the Fed’s data-dependent, “meeting by meeting” approach. That leaves the door open for another rate hike in September. Drivers of this meeting’s decision most likely include a still robust economic momentum (albeit moderating) and only very preliminary signs of some relaxation in the labor market. These developments most likely still outweigh the ongoing progress of disinflation. It seems like central bankers want to keep every option on the table, which can also be interpreted as a sign of uncertainty – not least with respect to their own forecasting abilities. The main message of the meeting is therefore that the Fed’s risk-management approach remains to rather err on the hawkish side than to give in too early.

Maybe we do not have to wait until September 20 to get more guidance. Lots of data is due to come out until then and central bankers will gather in Jackson Hole in late August. But for now, it seems like Jay Powell and his colleagues did not see the necessity to issue any new guidance other than the one we got in June. This maybe also reflect that markets currently price future rate hikes fairly in line with what the Fed was guiding them towards back then already.

Anna Stupnytska – Macroeconomista global de Fidelity International

The Fed’s decision to hike rates by 25 basis points at the July meeting was well-telegraphed and came as no surprise. The key question going into the meeting was around the messaging Powell would choose to send about further tightening. The “careful pace” of tightening he talked about in June had been taken to mean hiking at every other meeting – which they have delivered so far by skipping June and hiking again in July. In the press conference, Powell said the FOMC had not taken a decision to move to every other meeting and is going meeting by meeting, meaning that the September meeting is ‘live’. Given the continued resilience of the economy, especially the tightness of the labor market, we believe the Fed has further to go to ensure inflation is slowing on a sustained basis towards target and inflation expectations are well-anchored. We continue to expect the US economy to move into recession in the coming quarters, though the timing remains uncertain as the length of policy lags and the economy’s sensitivity to higher rates seem to differ significantly in this cycle relative to history.

Gordon Shannon, Portfolio Manager, TwentyFour AM (Boutique Vontobel)

While inflation appears to be gliding down to target, Powell is taking no chances. The FED just delivered a 25bps hike and by holding firm to their data dependant rhetoric and are trying to keep the September meeting live with the possibility that this won’t be their final hike. The Federal Reserve is weighing arguments that lagged impacts from previous hikes are still being transmitted into the economy while watching carefully for signs of credit tightening by banks.