Does the potential end of the Fed rate hike cycle signal a near-term pivot toward lower rates?
As widely expected, the Fed announced another 0.25% rate hike in its benchmark funds rate yesterday, marking the 10th consecutive rate increase in as many meetings. This latest rate hike brings the cumulative increase to 5% in just over a year, potentially capping a historically aggressive tightening cycle.
While the Fed’s policy rate is now at its highest point since 2007, in real (inflation-adjusted) terms, the fed funds rate has only recently risen into positive territory. Except for a brief period in 2019, real short-term rates have been negative for over a decade. However, even if rates hold steady from here, real rates are likely to rise over the remainder of the year if inflation edges lower as expected, further tightening financial conditions.
So what’s next for monetary policy? The recent softening in the Fed’s tone suggests that policymakers are ready to pause to gauge the effect of the collective tightening to date while leaving the door open to additional rate increases if inflation doesn’t ease meaningfully in the coming months. A pause is very different from committing to a near-term reduction in rates though, as they still prefer the ambiguity of preserving all options to ensure that policy objectives can be met. The futures market doesn’t see it that way and continues to price in a probable half-percent cut by year-end. Growing recession risk, tighter credit conditions, and banking sector turmoil all contribute to that view. That gap in expectations will be resolved as the near-term direction for growth and inflation become clearer.
The bottom line? The Fed may pause, but real short-term rates have further room to rise if inflation eases as expected. Such an outcome would equate to further tightening, even if the Fed stands pat.
Past performance does not guarantee future results. All investments include risk and have the potential for loss as well as gain.
Data sources for peer group comparisons, returns, and standard statistical data are provided by the sources referenced and are based on data obtained from recognized statistical services or other sources believed to be reliable. However, some or all of the information has not been verified prior to the analysis, and we do not make any representations as to its accuracy or completeness. Any analysis nonfactual in nature constitutes only current opinions, which are subject to change. Benchmarks or indices are included for information purposes only to reflect the current market environment; no index is a directly tradable investment. There may be instances when consultant opinions regarding any fundamental or quantitative analysis may not agree.
Plante Moran Financial Advisors (PMFA) publishes this update to convey general information about market conditions and not for the purpose of providing investment advice. Investment in any of the companies or sectors mentioned herein may not be appropriate for you. You should consult a representative from PMFA for investment advice regarding your own situation.