News

Published: May 20, 2023
Updated: May 20, 2023

Federal Reserve Chair Jerome Powell Signals Pause in Interest-Rate Increases, Citing Tighter Credit Conditions

In a notable statement, Federal Reserve Chair Jerome Powell indicated a strong inclination towards pausing interest-rate increases next month. Powell emphasised that the current policy stance is restrictive, and uncertainties remain regarding the lagged effects of previous tightening measures and the extent of credit tightening resulting from recent banking stresses. He expressed the need for careful assessment of data and the evolving economic outlook before making any further policy decisions.

Market Response: Rate Hike Expectations Diminish

Powell's comments had an immediate impact on market expectations, with investors significantly reducing their bets on a rate hike in the upcoming month. The probability of a rate increase dropped to around 17%, down from the previous 33% prior to Powell's speech. This shift reflects the market's interpretation of Powell's cautious tone and willingness to consider data-driven assessments.

Aggressive Tightening Campaign and the Potential for a Lower Peak

Over the past year, the Federal Reserve has undertaken an aggressive tightening campaign, raising interest rates by 5 percentage points to combat high inflationary pressures. However, Powell's remarks indicated a divergence among policymakers regarding further rate hikes. While some officials believe that additional increases are necessary due to insufficient evidence of cooling price pressures, Powell signalled a different perspective. He highlighted headwinds facing the economy, particularly the recent collapse of four regional US banks, which is contributing to tighter credit conditions and potentially impacting economic growth, hiring, and inflation.

Revisiting Rate Projections: Uncertainty Surrounding Peak Levels

In March, policymakers projected rates to peak at 5.1% according to their median outlook, a level that was reached earlier this month with the most recent rate hike. However, seven other officials anticipated the need for rates to go higher. The updated rate projections will be released in June, providing further insight into the Fed's outlook and the potential trajectory of interest rates.

Honoring the Memory of Thomas Laubach

The Fed conference, held at the central bank's headquarters in Washington, is a tribute to the late Thomas Laubach, a former Fed economist who passed away in 2020 at the age of 55. The conference serves as a platform for discussions and insights on key economic matters.

Implications for US, Global, and Indian Markets

Powell's signalling of a likely pause in interest-rate increases reflects the Federal Reserve's awareness of tighter credit conditions and potential headwinds to economic growth. This development has implications for various markets, including the US, global markets, and even the Indian market. Investors and analysts will closely monitor future data releases and the evolving economic outlook to gain a clearer understanding of the Federal Reserve's intentions and their impact on market dynamics.