After the US Federal Reserve raised interest rates this week to their highest level in 22 years, investment managers look at what this means for the economy, investors and whether there will be further hikes.

The Federal Reserve has increased its baseline interest rate by 0.25 per cent to a target range of 5.25 to 5.5 per cent, one month after a brief pause in hikes, as it continues to fight inflation.

Although consumer prices have consistently declined for the last 12 months from 9.1 per cent, consumer prices still rose by 3 per cent in June. Chairman of the Federal Reserve Jerome Powell said during a news conference yesterday that inflation has moderated since the middle of last year, but hitting the Fed’s 2 per cent target still has a long way to go. The market initially bounced following the meeting but ended mixed.

Here are some reactions to the hike from investment managers.

Bill Papadakis, senior macro strategist, Lombard Odier
“This meeting met two key expectations of the investment community: a hike of 25 bps, and a hawkish tone, even if the Fed is unlikely to hike much further from here. Given how much tightening has been done already, and our forecast on the path of inflation, our view is that this is the last Fed hike of the cycle. We expect the policy rate to remain stable at 5.25 per cent to 5.50 per cent this year. The next move will be toward gradual easing, but not before the end of the first quarter 2024. This is not an environment where the Fed is trying to solve an acute problem by aggressively cutting rates. At the same time, the Fed is likely to continue passive balance sheet normalization running in the background, more or less for the duration of 2024.

“There will be plenty of data releases before the September meeting to allow a better judgement on the path of rates. The message from the June CPI data was highly encouraging, with a downtrend not just in headline inflation but also in stickier core inflation, and notably core services stripping out shelter, and we believe more disinflation is in the pipeline. The labor market continues its slow rebalancing. Meanwhile, despite a series of strong recent data on economic activity, resilient growth that materializes in the context of disinflation is unlikely to be a concern for policymakers.”

Julius Baer
"The Fed is maintaining a fully data-dependent approach. It signals its readiness to raise rates further if inflation does not continue to fall or to end the hiking cycle once and for all if a cooling economy and labor market as well as tighter credit conditions argue for an unchanged or lower target range for the federal funds rate. We expect the Fed to keep interest rates at the current restrictive levels through the first half of 2024 and to begin easing monetary policy with cautious rate cuts in March 2024 at the earliest as the economic slowdown should deepen. We expect US inflation to continue to fall and weakening demand to accelerate this decline in the coming months. A cooling economy and labor market as well as tighter credit conditions argue for an unchanged federal funds target range in the coming months. At the same time, the lower risk of recession suggests that the federal funds target rate will remain at its current restrictive level for longer, i.e. until the first half of 2024, when we expect the Fed to start easing monetary policy with gradual rate cuts as the economic slowdown should deepen."

Jack McIntyre, portfolio manager, Brandywine Global
“This hike was probably one of the more well-telegraphed Federal Open Market Committee (FOMC) moves in the past year. The Fed was expected to tighten by 25 basis points, and they did just that. It was a “nothingburger,” but that isn’t a bad thing since it gives the Fed plenty of time to analyze a host of future economic data until its next meeting at the end of September. In the meantime, watch the Employment Cost Index, which Powell singled out. That could be the next market-moving data point, and it's due on Friday. The Fed is interpreting the economic data just like the rest of the market, so even the central bankers don’t know yet if they’re done tightening rates or set to embark on a prolonged pause. We’re all back to being data dependent. Remember, as inflation falls the Fed’s monetary policy automatically becomes even tighter given that the real, inflation-adjusted fed funds rate increases.”

Daniele Antonucci, chief investment officer, Quintet Private Bank (parent of Brown Shipley)
“That the Fed was going to raise rates by a further quarter-point was a done deal. The important thing is that the statement looks roughly unchanged, with the central bank not really signaling a slower pace of rate hikes at future meetings. The good news, however, is that as economic growth and headline inflation ease, the prospect of higher interest rates for longer becomes increasingly unlikely. US inflation is now about 3 per cent – down more than six percentage points from the peak last year and lower than in Japan.

“In the eurozone, inflation is almost half of the 2022’s peak of 10.6 per cent. However, central banks have chosen to keep their cards close to their chest on potential future rate changes, opting instead to buy more time to assess incoming data.This is because core inflation (which strips out food and energy) is still high, particularly in the UK where it has declined minimally. So, despite the positive market reaction to falling headline inflation, the fight is not won yet, but we believe we’re entering the final round. We expect the Fed likely has one rate increase left, or perhaps it won’t even have to raise rates any further.

“The European Central Bank, however, is poised to continue pushing interest rates higher for a little while longer. The Bank of England has a much tougher job on its hands to combat persistently high inflation in the UK. It has acknowledged that a recession may be necessary to make meaningful headway in bringing down inflation. While there’s significant uncertainty on the level BoE rates will likely reach in the UK, we expect a peak of 6 per cent.”

Gurpreet Gill, global fixed income macro strategist, Goldman Sachs Asset Management
“Paradoxically, today’s Fed meeting was one of the most certain and uncertain of the cycle. A 0.25 per cent rate hike was fully priced in and widely expected by forecasters and investors. However, investors remain divided on whether this marks the last increase in the current tightening campaign.

“We think recent data is consistent with the US policy rate peaking in July, as core CPI inflation slowed sharply in June. But any renewed signs of inflation strength in key data like the Employment Cost Index released on Friday and upcoming PCE inflation releases still have potential to extend the hiking path. Given the uncertainty around when the Fed’s hiking cycle will conclude, we have limited exposure to US rates. We think further disinflation progress will limit the extent to which US Treasury yields will rise, while a resilient labor market and economy will temper the extent to which yields can fall.”

Marios Chailis, Libertex Group
“The Fed’s setting of the interest rate to a 22-year peak brings to a climax a 16-month hiking cycle. When it comes to tightening monetary policy, the question beckons – is this the end of the beginning, or the beginning of the end?

“The answer will be determined by the performance of inflation. Currently sitting at 3 per cent, the Fed is hoping the latest hike will bring about more stability. For equity markets, this hike should theoretically dampen the prospect of a bull run. High rates lead to competitive bond yields and theoretically slow down economic growth, impacting potential stock earnings. Yet the S&P 500 Index is hovering just below its all-time peak and, with major tech earnings scheduled for this week, it is not known whether the rate increase will push investment away from equities or if we should expect a rally. Adding to the mix, there’re also US recession concerns with negative GDP growth projected.

“Overall, the interest rate decision offers little certainty for the future. For the moment, it seems that a balance of sorts has been struck between the interest rate and inflation. Yet this is a delicate balancing act, and with strong company earnings countering and the prospect of a recession in the coming quarters, the US situation could change quickly. The Fed is moving forward slowly and cautiously – this might not be the end of the hike cycle.”