The US Federal Reserve has increased the funds rate by 25 bps to 4.5–4.75 per cent — the eighth hike since March 2022.
In its monthly statement, the Federal Open Market Committee (FOMC) said inflation “remained elevated” despite “somewhat easing” in recent months.
The central bank has also confirmed plans to action further hikes in the near term, stating “ongoing increase” to the funds rate would be “appropriate” to ensure monetary policy is “sufficiently restrictive” to return inflation to the target range of 2 per cent.
However, the pace of tightening has slowed, with the Fed returning to 25 bps increases for the first time since commencing the tightening cycle in March last year.
Fed chairman Jerome Powell has also suggested the funds rate is approaching its peak, hinting at “a couple more” hikes.
According to VanEck portfolio manager Cameron McCormack, the funds rate is likely to peak at 5.25 per cent.
“The Fed’s tempered 25 basis point increase signals that the US is near the end of its rate hike cycle,” VanEck said.
“We think it’s likely that the Fed will increase the funds rate by another 50 basis points reaching a terminal rate of 5.25 per cent in the second quarter of 2023.”
But other analysts, including ANZ Research and ING Economics, are forecasting just one more hike.
ING Economics has noted that both the ceiling and the lower band of the Fed funds target rate range are above core inflation for the first time since 2019.
“At the same time, the economy continues to lose momentum and we suspect inflation will fall quickly from here, on a topping out of housing rents, lower car prices, and a decline in corporate pricing power,” the research group observed.
“The jobs market remains the area of strength that worries the Fed, but we doubt this can remain as strong as it is in the face of spreading corporate gloom and weakening activity.”
ING Economics is expecting the consumer price index (CPI) to fall to 5.7 per cent ahead of the next FOMC meeting.
“It should be enough to go for a final 25 bp hike, but we doubt they will continue to say ‘ongoing increases’ at that point and will instead switch to a data dependency stance without committing to a pause,” ING Economics added.
The research group then expects the Fed to pause the cycle in May before reversing its monetary policy strategy in September.
“Over the past 50 years, the average period of time between the last rate hike in a cycle and the first rate cut is six months, which would point to September as being a ‘live’ meeting for the first rate cut,” ING Economics observed.
“By then, we think the recessionary forces will be building with inflation in the region of 3 per cent, which will give the justification needed for the first cut.”
