The Fed pause may be upon us, but so may be the impact of higher rates

DEWITT, Mich. - May 9, 2023 - PRLog -- Key takeaways:

• This past week, markets were faced with a triple whammy of data: A Federal Reserve interest-rate hike (perhaps its last of this cycle), ongoing turmoil in the banking system, and a key jobs report for the month of April.
• After raising interest rates by over 5.0% in a little over one year, the Fed may finally be considering a pause in its rate-hiking campaign. But the long and variable lags of the past year of interest-rate increases may already be upon us and impacting the real economy. This can be seen from the uncertainty in the regional-banking system and incremental tightening in lending standards, to a softening in manufacturing and the housing sector.

The Fed says no to rate cuts – markets don't buy it yet

On May 3 last week, the Federal Reserve implemented what perhaps could be the last interest-rate increase of this hiking cycle. The Fed raised rates by 0.25%, its 10th consecutive rate hike since March 2022, bringing the fed funds rate to 5.0% - 5.25%.

In our view there were two key takeaways from this month's Federal Reserve meeting:

1. The Fed language indicated that a pause in rate hikes may be likely: While Chair Powell did not comment explicitly that the Federal Reserve was ready to pause interest rates, some of the language in the Fed statement hinted that a pause may be coming. The statement removed the phrase, "some additional policy firming may be appropriate," and replaced it with language that it would assess incoming data to determine "the extent to which" additional tightening would be appropriate. For many investors, this change was a signal that the Fed no longer assumed that further rate increases were appropriate.
2. Fed Chair Jerome Powell pushed back against the notion that the Fed may soon cut rates: While the Fed may be considering pausing its rate-hiking cycle, Powell pushed back on the notion that rate cuts may be coming soon as well. He noted that "it would not be appropriate to cut rates" given inflation remains elevated and may take time to ease back towards the 2.0% target. Nonetheless, markets continue to price in Fed rate cuts, as early as the September meeting. In our view, the strong labor report for April makes it incrementally less likely that the Fed will cut rates, and it will most likely take the approach of an extended pause.