The Strategist

Fed - Time for an interest rate pause

As expected, the US Federal Reserve (Fed) last week raised its key interest rate by a further 25 basis points to a new target range of 5.00-5.25%. With this step the Fed has raised the Fed funds rate by 500 basis points in the last 14 months - the steepest rate hike cycle in the last 40 years. Now the Fed is likely to take an expected pause, although the term "breather" would be more appropriate. 

Thomas Wille
Temps de lecture
10 minutes
Fed interest rate pause
© Shutterstock

On the one hand, because of the time lag as the US monetary authorities want to analyse how the rate hikes in the recent months have affected economic growth, the labour market and the still-high inflation level. On the other hand, Fed Governor Jerome Powell gave no indication won at the latest press conference that the fight against inflation is already won. It is likely that interest rates will remain higher for longer. Markets are pricing in another three to four rate cuts by the end of the year. We do not expect this to materialise.

The Strategist Podcast

Job market in the US remains tight

The US labour market data for April impressively showed that there is no relief in sight. The unemployment rate even fell to 3.4%, while analysts had anticipated an increase from 3.5% to 3.6%. Wage inflation also rose from 4.2% in March to 4.4%. These figures confirm that the Fed's pause is probably more a breather, not a turnaround or reversal of the current interest rate cycle. At best, we have now already seen the last rate hike, but we are still months away from rate cuts.

Two tail risks

The regional banking crisis in the US hangs like a sword of Damocles over the financial markets. The Fed's massive cycle of interest rate hikes is claiming more and more victims among regional banks. The problem still appears to be under control, but with each troubled bank, investors’ nerves are further tested. JP Morgan's acquisition of First Republic Bank was greeted with some satisfaction by the broader equity markets, but the next few weeks will show whether the crisis in US banking remains contained or spreads to the entire banking system.

The second tail risk is the US debt ceiling, which we discussed at this point two weeks ago. The deadline is fast approaching, and US Secretary of the Treasury Janet Yellen warns of the potentially devastating consequences on an almost weekly basis. We still expect a last-minute solution but expect insecurities and nervousness to accelerate in the coming weeks. 

Stay selective and focus on quality

Given these challenges, we recommend that investors remain selective in the coming weeks. We have a clear preference for equities from the rest of the world over the US and prefer stocks that have been able to convince investors in the running corporate earnings season. At the same time, gold remains a safe anchor in our portfolios in stormy times.

Prendre contact