Markets have reacted positively to indications from the US Federal Reserve that it is done with raising interest rates, but the optimism may be excessive, according to a number of market participants.
Although rates were lifted by 0.25 per cent to 5.25 per cent, and this is the highest level for sixteen years, the language accompanying the announcement was taken by the market to imply that further rate rises are unlikely.
Susan Hill, senior vice president at Federated Hermes, says: “A contextual change in the FOMC post-meeting statement hinted strongly that policymakers are content to move to the side-lines for a while.
"Out was the March statement’s sentence: 'The Committee anticipates that some additional policy firming may be appropriate'.
"In was the statement: 'In determining the extent to which additional policy firming may be appropriate to return inflation to 2 per cent over time'.”
Chairperson Jerome Powell said the decision to pause had not been made but emphasised that policy action at the upcoming meeting in June would be more data dependent than ever.
Hill adds: "This is the appropriate stance. Until the economic impact of tighter credit conditions resulting from the March banking sector stresses is better understood, taking a breather is warranted."
George Lagarias, chief economist at Mazars says that even if rate rises are paused from here, this is almost “irrelevant” because the current peripatetic banking crisis in the US has much the same impact on financial markets and the economy as rate rises.
This is because, as liquidity declines in the economy, commercial banks rein in their lending, or charge more in interest, and also potentially pay out more in interest to depositors, all of which actions serve to shrink the money supply.
Lagarias says: “Powell’s comments left markets exuberant, perhaps too much. The Fed chairperson hinted at a pause, without directly promising one.
"Yet investors cheered the end of rate hikes altogether. Bond market movements are now suggesting zero rate hikes from here on and no less than four rate cuts by January.
"Perhaps we have reached the end of the rate hike cycle, or perhaps we have a few more yards to go. At this point, it is almost irrelevant.
"Financial conditions will continue to tighten for some time, due to the combination of high interest rates and increased banking stress in the US."
Profound impact
But Hugh Grieves, who jointly runs the US Opportunities fund at Premier Miton with Nick Ford, believes the comments on chairperson Powell can have a profound impact on market.
Speaking in the context of the latest US jobs data showing unemployment is actually lower now, at 3.4 per cent, than it was on the day rates began to rise, he says the signal from the Federal Reserve means investors are now happy to view positive economic data as being good news.
Previously, positive data was interpreted as meaning that interest rates would have to rise still further in order to slow the economy and curtail inflation.
