Central bank opts for the lesser of three evils
Going with the narrative of damned if it does and damned if it doesn’t, the Federal Reserve (Fed) stuck to its script and raised rates by 25 basis points (bps) – the lesser of the three evils.
Hiking 50 bps would have seemed insensitively cavalier to the banking issues that the US finds itself in and markets would likely have panicked. Doing nothing would have been an equally damaging market event, signalling that the Fed had lost faith in its own tools. So the 25 bps camp was likely always going to be the winner.
Financial conditions have likely tightened since Silicon Valley Bank’s collapse over a week ago and inflation remains sticky so the US is staring down the barrel of very unwelcome economic downward momentum. Tackling inflation, as we have seen from the Fed over the last year, has brought about unintended consequences to some parts of the economy but it is in reality trapped by being so late to the inflation party. Citing that continued rate rises can be tolerated by the economy is an optimistic turn of phrase perhaps but this is classic Fed-speak, hitting consumers where it hurts, but at the same time saying it has to in an act of tough love.
The information in this document is given for information purposes only and does not qualify as investment advice. Opinions and assessments contained in this document may change and reflect the point of view of GAM in the current economic environment. No liability shall be accepted for the accuracy and completeness of the information. Past performance is not an indicator for the current or future development.