US rate hike cycle nears end: One done, one more to go, maybe

Federal Reserve Board Chairman Jerome Powell speaks during a news conference following a Federal Open Market Committee meeting, at the Federal Reserve in Washington, DC, on July 26, 2023. Image: Saul Loeb / AFP

In a widely expected move, the Federal Open Market Committee (FOMC) hiked key rates by 25 basis points to a 22-year high at 5.25 percent to 5.5 percent. Global markets had priced in the rate action, but the lack of forward guidance on the rate trajectory weighed on market sentiments. More specifically, markets were hoping for a clear signal from the US Federal Reserve that rates had peaked. However, the central bank’s chairman Jerome Powell burst the bubble.

“It’s certainly possible that we will raise funds again at the September meeting if the data warranted. And I would also say it’s possible that we would choose to hold steady. We’re going to be making careful assessments meeting by meeting,” Powell said.

This wasn’t music to the ears of investors, although FOMC members had indicated in the previous meeting that two more rate hikes are likely this year. Since March 2022, the US Fed has lifted rates by 525 points to rein in soaring price levels. In June, inflation cooled to 3 percent year-on-year (y-o-y) from 9.1 percent y-o-y in the same period last year. But the central bank believes there’s a long road ahead as it aims to pin inflation to 2 percent. Monetary policy tightening has pushed the economy to the brink of a recession.

There are upside risks to inflation as global food prices are under pressure in an uncertain and volatile macroeconomic environment with escalating geopolitical tension between the US and China and a war in Ukraine. “We need to stay on task and we think we’ll need to hold policy at restrictive levels for some time, and we need to be prepared to raise rates further if we think that’s appropriate… it’s not an environment where we want to provide a lot of forward guidance," Powell said at a press conference. Most central banks have adopted a stance of assessing incoming data of inflation and economic activity and its implications for monetary policy on a meeting-by-meeting basis. 



Madan Sabnavis, chief economist, Bank of Baroda, believes the Fed Chair has left room for further rate hikes and reiterated that the decision will be contingent on incoming data. “However, rate cuts in CY23 were ruled out. High inflation, particularly on the services side, as well as tight labour markets remain key risks for the Fed. Hopes of a ‘soft landing’ remain intact, with the economy showing strength,” he adds.



Interestingly, the wording of the policy wasn’t very different from the June policy, when the FOMC had unanimously voted to hold rates and assess the impact of the rate hikes. For instance, in the previous meeting, the FOMC had noted that holding the target range steady would allow the committee to assess additional information and its implications for monetary policy. It also signalled that the rate cut cycle is far-off.

Also read: Coming up: Two more rate hikes by the US Fed this year


“As anyone can see, not a single person on the committee wrote down a rate cut this year, nor do I think it is at all likely to be appropriate. It will be appropriate to cut rates at such time as inflation is coming down really significantly. And again, we’re talking about a couple of years out,” Powell had said in June.

Madhavi Arora, Emkay Global’s lead economist, observes, “The only notable change to the post-meeting statement was an upgrade of the description of economic growth to 'moderate' from 'modest' in June and still added a bias toward 'additional policy firming'.  While the statement had a hawkish bias, Chair Powell’s post-meeting press conference tilted a little toward the dovish side. While noting the FOMC is not committed to further action, he stated he saw encouraging signs on labour markets and inflation. Interestingly, he noted that the staff backed off its 2023 recession forecast later this year to a notable slowdown in growth.”
 
Naveen Kulkarni, chief investment officer, Axis Securities PMS, says the US Federal Reserve’s increase in interest rates by 25 bps was on expected lines, but more importantly, the commentary and press conference were largely neutral.  “Considering the massive rate hike cycle in place and inflation challenges reducing, more rate hikes are not needed at this juncture. Further rate hikes could be detrimental to economic growth prospects raising the chances of a hard landing. So, the interest rate cycle has largely peaked, but its impact will be seen in the forthcoming quarters. India is also placed in a similar manner, with rate hikes primarily done. There is a possibility of one more rate hike, but the Reserve Bank of India’s stance is likely to be balanced,” he adds.  

Oil prices declined 1 percent after the US Fed hiked rates by 25 basis points, but stock markets remained relatively muted. The Dow Jones closed 0.2 percent higher, S&P 500 was unchanged, and the FTSE shed 0.2 percent at the end of the trading session. Asian markets were subdued: Nikkei was flat, Hang Seng and the Shanghai Composite closed 0.4 percent and 0.3 percent lower respectively. The Sensex and the Nifty50 were trading lower at 0.1 percent and 0.06 percent each at 11.20 am