In a highly anticipated move, the US Federal Reserve(Fed) is likely to hit the pause button on its interest rate hikes at the upcoming June meeting, according to the minutes of the May 2-3 gathering released on Wednesday. The prospect of a temporary halt to the rate hikes has sparked optimism in the financial markets.
The minutes revealed a divergence of opinions among Fed officials, with some advocating for a continuation of the tightening cycle while others expressed reservations. Notably, several policymakers indicated that if the economy progressed as anticipated, further policy firming might not be necessary.
Nigel Green, CEO and market analyst of deVere commented on the situation, saying, "Although officials agreed that inflation was still 'unacceptably high,' when the Fed says 'may not be necessary,' this suggests a pause. In addition, the use of the word 'several' hints at a majority." Green also pointed out that Fed Chair Jerome Powell had signaled openness to backing a pause in rate hikes during recent speeches.
The prospect of the Fed taking a breather and leaving interest rates unchanged, which currently stand at their highest level since 2006, is expected to elicit a positive response from the markets. Nigel Green emphasized that this development would give the impression that the end of rate hikes is drawing nearer.
However, Green cautioned investors that a pause in rate hikes should not be misconstrued as a shift towards a dovish stance. He emphasized that it would still represent a "hawkish pause," suggesting that the central bank could resume tightening in the future.
Supporting the case for a pause, there are three key reasons why the US Federal Reserve would be prudent in hitting the brakes on interest rate hikes at this juncture.
Firstly, the US financial system is grappling with an ongoing crisis that has yet to fully dissipate. Lingering concerns about potential bank failures continue to cast a shadow, heightening anxieties regarding the stability of the system. The repercussions of this crisis are already evident, as the turmoil has led to a decrease in bank lending, resulting in tighter credit conditions for households and businesses. This credit squeeze is likely to dampen economic activity and hiring in the near term.
Secondly, it is crucial to acknowledge the time lag inherent in monetary policies. The full effects of interest rate hikes typically take between 18 months and two years to permeate the broader economy. By pausing the rate hikes, the Federal Reserve would allow for a more comprehensive assessment of the impact of its previous actions before deciding on the next steps.
Lastly, an alarming signal emanating from the bond market is the inverted yield curve. Historically, an inverted yield curve has preceded nearly all recessions since 1960. The current inversion suggests a potential economic downturn in the near future. Acknowledging this warning sign, it becomes increasingly essential for the Fed to exercise caution and carefully assess the overall economic landscape.
The collective wisdom suggests that a pause in interest rate hikes in June would be the right course of action for the US Federal Reserve. This move is expected to alleviate market concerns and provide breathing room for the financial system. Additionally, it would allow the central bank to monitor economic developments more closely and make informed decisions about the potential need for future rate cuts later in the year.
