The U.S. Federal Reserve raised its benchmark interest rate by 25 basis points (bps) last month, despite turmoil in the banking sector, as it remains focused on bringing down inflation.
In recent weeks, Fed Chair Jerome Powell opened the door to a potential return to jumbo-sized rate hikes, however after the collapse of Silicon Valley Bank (SVB) and Signature Bank, the Fed chose to proceed with a more modest increase. The 25 bps increase brings the federal funds rate to a range of 4.75% to 5% – a level markets expect could be close to the peak in this cycle.
“Since our previous Federal Open Market Committee meeting, economic indicators have generally come in stronger than expected, demonstrating greater momentum in economic activity and inflation,” Powell said. “We believe, however, that events in the banking system over the past weeks are likely to result in tighter credit conditions for households and businesses, which would in turn affect economic outcomes.”
Inflation remains elevated, with the Consumer Price Index (CPI) rising 6% in February and core services ex-housing inflation (which Powell has cited as the “most important” measure of inflation) up 5% year over year. The U.S. labor market has also shown resilience, with unemployment hovering near multi-decade lows and more than 300,000 new jobs added in February.
The latest Summary of Economic Projections suggests that Fed governors expect only one more rate hike this year. But Powell reiterated the rate cuts were not in the Fed’s “base case.”
“If we need to raise rates higher, we will,” he said. “I think for now, though, we see the likelihood of credit tightening. We know that can have an effect on the macroeconomy, on demand, on the labor market, on inflation.”
Here are the latest views from Tim Ng, a fixed income portfolio manager and member of Capital Group’s U.S. rates team.
Timothy Ng is a fixed income portfolio manager with 17 years of industry experience (as of 12/31/22). As a fixed income investment analyst, he covers U.S. Treasuries, TIPS and interest rate swaps. He holds a bachelor’s degree with honors in computer science from the University of Waterloo, Ontario.
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