It seems more than likely that quietly the Fed believes we are now at peak rates
Nearly 16 years ago on the eve of the Global Financial Crisis (GFC), the Federal Funds Rate stood at 5.25%. That is a long time in investment circles and it is a little disquieting that we find ourselves now back at that same rate level after one of the most aggressive hiking cycles by the Federal Reserve (Fed) in many decades. For many investment professionals cutting their teeth post GFC, this is undeniably an alien environment when all they have ever known is low rates forever.
Today’s hike of 25 bps was as expected and the omission of previous language that ‘additional policy firming may be warranted’ was also what the markets were largely praying for. The Fed left the door ajar just enough to allow for additional rises based on data dependency, not that anyone believes it would. The slowdown in credit formation resulting from the banking turmoil and its impact on growth will be key determinants that the Fed will be watching and it is more than likely that quietly the Fed really does believe we are now at peak rates. How long we stay here is the all-important question, with cuts of up to 75 bps for the second half of the year currently priced into markets. While Powell et al may want to glide along on pause for a while yet in their battle against inflation, what goes up inevitably must come down and he may find that an accelerating deterioration in the economic landscape will see the Fed having to become very data dependent indeed.
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