The recent 25bps hike is in line with consensus expectations and many will see it as the most palatable outcome for markets. There was talk of a pause in the lead up to the meeting, but sentiment about the financial sector has turned more positive in recently, and investors are reasonably confident that quick actions by regulators have avoided a systemic financial crisis.
What is the context of the hike?
Inflation is still above target, so a pause would have signalled concerning levels of economic pessimism from the Fed. When parts of the economy start to break it has historically marked the beginning of the end for rate increases. The collapse of SVB, Credit Suisse and Silvergate are signals that rates are starting to bite, despite the contradictory economic data.
The 25bps hike shows the Fed is still determined to tackle inflation, but is more measured in its approach, and this was supported by the more dovish language in the press conference. Signs that the US is nearing the end of its rate cycle could bode well for the longer term prospects of US tech stocks, which have been hit hard by rate increases over the past year.
What does this mean in the grand scheme of things?
But the Fed does not expect to cut rates by the end of the year, and the short term outlook is still uncertain. The injection of significant amounts of U.S. dollar liquidity into the system by several major central banks, suggests that concerns about a credit crunch were not unfounded — so gold is likely to see continued inflows as investors seek safe haven assets.
This move has been boosted by Treasury Secretary Janet Yellen’s comments that there are no plans to guarantee all bank deposits. That said, treasury yields have decreased following the Fed’s announcement, which suggests a move back into equities could be on the horizon.
Megan Stals is a markets analyst at brokerage platform, Stake.