As was expected, the US Federal Reserve increased benchmark rates by 25 basis points today. Markets had long anticipated the move, which pushed rates to the highest they have been in over 22 years.
In the Federal Open Market Committee statement, the bank said that while the economy has been expanding at a moderate pace, job gains have continued to be robust, and inflation remains elevated.
The Committee said it will continue to monitor the situation in determining if more tightening is necessary as it seeks to return inflation to 2%. The Committee did acknowledge the delayed effect of rate hikes. The vote to raise by 25 bps was unanimous.
During the Q&A session, Fed Chair Jerome Powell indicated they were taking a meeting-by-meeting approach as the assess economic data.
Shirley Singh, Vice President of Moody’s Investors Service, indicated there would be pain for corporate borrowers.
“The latest 25 basis point increase in U.S. Federal Reserve interest rates will further erode credit quality for B3-rated companies. The high cost of capital, combined with difficult lending conditions and weak profit forecasts has rendered a greater disadvantage for this heavily indebted rating class, and we anticipate more than half of B3-rated companies will find interest costs particularly onerous.”
Marios Chailis of the Libertex Group said the rate increase brings climax to the 16 month hiking cycle, asking if this is the end of the beginning or the beginning of the end.
“The answer will be determined by the performance of inflation. Currently sitting at 3%, the Fed is hoping the latest hike will bring about more stability. For equity markets, this hike should theoretically dampen the prospect of a bull run. High rates lead to competitive bond yields and theoretically slow down economic growth, impacting potential stock earnings. Yet the S&P 500 Index is hovering just below its all-time peak and with major tech earnings scheduled for this week, it is not known whether the rate increase will push investment away from equities or if we should expect a rally. Adding to the mix, there’re also US recession concerns with negative GDP growth projected,” said Chailis, who added that rates seem to have struck a balance with inflation.
“…this is a delicate balancing act, and with strong company earnings countering and the prospect of a recession in the coming quarters, the US situation could change quickly. The Fed is moving forward slowly and cautiously – this might not be the end of the hike cycle,” he added.
Currently, there is an opinion for everyone. Some see more rate hikes, others a pause and some are predicting cuts later this year. Of course, there is always the possibility of stagflation – no growth and rising inflation. Part of the challenge is the amount of stimulus in the system due to fiscal policy and extensive spending programs initiated by the Biden Administration. The fiscal policy battles with a tightening monetary policy. The big loser being consumers who have to deal with higher prices.
