Morning Brief – 5-5.25%

Charles Porter
Thu 4 May 2023


Yesterday’s Federal Reserve interest rate decision saw the Fed deliver their 10th consecutive rate hike. The May decision only saw rates raised at the central bank level by 25 basis points. Psychologically, this pushes US benchmark rates above the significant 5% level. As we wrote yesterday, raising the cost of debt servicing also adds additional risk to financing costs at the government and private sector levels. Despite the hike to interest rates, the language that accompanied the decision, as ever, held the key to comprehending the true sentiment and impact behind the adjustment at the Federal Reserve.

Within the decision, there was significant acknowledgement of the potential for deteriorating economic data that may render any further rate hikes from the Fed unnecessary. The impact of the turmoil in the US banking sector was also acknowledged with the availability of credit potentially limiting the requirement to raise the cost of borrowing further via monetary policy adjustment. The focus on data dependence remained but the Fed Chairman Jay Powell noted the importance of the shifting rhetoric and language that accompanied the decision.  

Most importantly, the Fed dropped the key sentence present in the March meeting that “additional policy firming may be appropriate”. This was taken as a signal to the market that unless proved otherwise we should consider that the terminal rate has been met. Some residual pricing of further hikes in the months ahead was unwound immediately but with little impact to the US Dollar, suggesting the FX market at least was not initially surprised by the decision. Overall the event will enable a softer US Dollar and make a significant recovery in the greenback harder to achieve. 

Discussion and Analysis by Charles Porter

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