In what has been deemed the most aggressive tightening campaign since the 1980s, the Federal Reserve met market expectations by increasing its benchmark federal funds rate by a quarter percentage point in its latest FOMC meeting, alluding that a pause may very well be on the horizon.
With the Federal Reserve hiking rates to levels not seen since 2007, market participants will remain hopeful that this is the final move in the FED’s ongoing battle against heated inflation. Despite core inflation remaining stubbornly high, “tighter credit conditions are likely to weigh on economic activity, hiring and inflation,” which could pave the path to a pause in rate hikes. With interest rates at near-zero levels early last year, the vigorous hiking campaign has led to increasingly tightened credit conditions, which has seen the banking system endure extensive stress. However, policymakers believe bank conditions have “broadly improved since early March.” Despite wage inflation trending lower and job openings declining, Jerome Powell, Chair of the Federal Reserve, highlights that unemployment levels remain low, strengthening the case for the U.S. to avoid a recession.
Following the much-anticipated announcement, major U.S. indices trended lower, with the benchmark S&P 500 index closing 0.70% down on Wednesday, the 3rd of May. Despite the Federal Reserve raising rates by a further quarter percentage point, the U.S. Dollar Index fell by a marginal 0.20%, indicating that market participants may be pricing in the potential for a rate pause come the next FOMC meeting. Next, all eyes turn to Friday’s Non-Farm Payroll (NFP) data report and next week’s CPI release, which will provide market players with some additional insight into how the FED plans to evolve its stance in a historically heated battle against inflation.