The world's most powerful central bank has hiked interest rates again, and the language used by its head suggested to some investors that a peak is in sight. Whether they are correct is another matter. Here are reactions from wealth managers.

The US Federal Reserve yesterday hiked interest rates by 0.75 per cent, or 75 basis points, to a range between 2.25 per cent and 2.5 per cent. Fed chairman Jerome Powell did not go into detail about future rate rises and hinted that there would be an eventual slowdown in such hikes. 

The comments in his press remarks following the announcement prompted stocks to rise. The assumption seems to be that rates aren’t heading much higher from here. It is worth noting that inflation is at near double-digit levels in the US and in many other developed nations. Debate remains on how much of it is transitory or more entrenched. 

Here is a roundup of some wealth managers’ and economists’ views on the Fed decision.

Kiran Ganesh, multi-asset strategist, UBS Global Wealth Management
“In going for 75 bps, rather than 50 bps or 100 bps the Fed is trying to thread the eye of the needle as it seeks to underline its credibility on inflation-fighting while also staying mindful of the risk of overtightening. For now, markets are likely to take the in 'line’ release well, but inflation and the pace of rate hikes will need to come down before we see a more sustainable rally.”

Salman Ahmed, global head of macro and strategic asset allocation, Fidelity International
“The continued focus on inflation and labour market strength was striking in the press conference comments as the two main drivers behind the pace of hiking. We think a significant slowdown is already in the pipeline and will start to show in hard data in the coming weeks and months. 

“However, continued strength in the labour market – with only very tentative signs of some easing in demand and supply pressures – and the Fed's focus on lagging hard data means another 75 bps hike is possible at the next meeting. The risk here is that the Fed tightens policy too far too quickly, making a hard landing inevitable. 

“Markets have toned down the level of terminal rates in this cycle to around 3.25 per cent with a more front-loaded profile in recent days. We agree with this current setup, but think another hawkish burst from the Fed, driven by (lagging) hard data, is possible in the short term. Given the pressure to visibly reduce inflation via monetary policy, conflicting signals mean short-term policy profile from here remains uncertain.”

Richard Flynn, UK managing director, Charles Schwab
“Today’s announcement underlines that the Fed is focused squarely on bringing down inflation. More rate hikes are likely in the second half of the year, and it’s worth remembering that in addition to rate hikes, the Fed is also tightening policy by allowing its balance sheet to shrink. In other words, Treasury securities held by the Fed are being allowed to mature without the Fed reinvesting the proceeds – a strategy called quantitative tightening.

“The Fed’s aggressive tightening risks tipping the economy into recession. GDP growth was negative in the first quarter, and likely weak in the second quarter. Leading indicators of growth, such as housing activity, new business orders, and consumer spending have all turned lower in the past few months. 

“The outcome of running a tight monetary policy in a slowing-growth environment is likely to be a further flattening or inversion of the yield curve, the underperformance of riskier segments of the bond market, and a stronger dollar. As the tug-of-war between inflation and recession fears plays out in the second half of the year, we expect to see highly volatile markets.”

Seema Shah, chief strategist, Principal Global Investors
“The Federal Reserve’s 75 bps increase now means that, in the space of just four months, they have hiked rates by as much as they did over the entire 2015 to 2018 hiking cycle. This is rapidly proving to be one of the most aggressive hiking cycles we’ve seen in recent decades.

“From here, it is possible that the Fed slows its tightening pace, reassured by the likely peaking of inflation and pullback in inflation expectations as oil prices have fallen. However, with the labour market still a picture of strength, wage growth still uncomfortably high and core inflation set to decline at a glacially slow pace, the Fed certainly cannot stop tightening, nor can it downshift gears too much. 

“Combatting four-decade high inflation will take a sustained show of strength from the Fed, rendering a soft landing an almost impossible pipe dream. We continue to expect rates to rise above 4 per cent next year, before recession opens the door to rate cuts in late 2023.”

Thomas Costerg, senior US economist, Pictet Wealth Management
“The 75 bps rate hike (bringing the bank reserve rate to 2.40 per cent) is similar in size to the one in June, but the "packaging" is quite different, and ultimately much more measured.

“Although officially still focused on high inflation, the first concessions on the risk of economic recession have started to emerge.

“Echoing this, the Fed stopped giving indications for the next meeting in September, while suggesting a slowdown in the pace ahead. The tone was rather evasive. According to chairman Powell, it will be a matter of 'meeting-by-meeting’ from now on, which means everything and nothing.

“For us the conclusion is that the famous 'peak Fed' could be reached. Certainly not the peak in rates, which is still (but only moderately) above, but the peak in the Fed's aggressive rhetoric and in particular its relentless fight against high inflation. The willingness to consider economic deceleration (for now the Fed is still rejecting the term 'recession', clinging to the branches of the still strong labour market) is perhaps its foot in the door.”

David Page, head of macroeconomic research, AXA IM
“Our expectation before this meeting was that the Fed was broadly comfortable with financial conditions as they were, but that it would be difficult to keep them at this level. We considered the Fed would rather for now see them tighten further than soften. That to us explained the 'sameness’ as June’s approach, both with policy rate moves, statement and longer-term rate forecasts, but equally with a now unanimous Fed and the suggestion that it “might” do 75 bps again in September. 

“However, the economy is showing signs of softening quickly; there are signs of easing in the labour market – albeit just the beginnings as Powell acknowledged; and the talk of recession is rising. And our impression was that Powell’s press conference was just a little less fiery and hawkish than it had felt in June. There is much data to come, both over the next couple of months, but even over the next couple of days. For now, though, we remain of the view that the Fed will soften the pace of hikes over coming meetings to 50 bps in September, 25 bps in October and leave rates unchanged at 3.25 per cent in December. Should the Fed prove nimbler in decelerating the pace of hikes, we think it will keep rates at those levels for most of 2023.”