rate the engine near the pause signal

The rate hike was a unanimous decision of the Fed’s committee members and was broadly in line with market expectations. However, a dove—indicating an upcoming stop—is hovering. The Fed’s next meeting is on June 13-14.

The notable change in the Fed’s tone is comforting. For example, the Fed has said, “Looking ahead, we will take a data-dependent approach to determining the extent to which additional policymaking may be appropriate.” In comparison, at the March meeting, the Fed noted, “The Committee anticipates that some additional policy setting may be appropriate.”

This suggests that this increase may be the last in the current tightening cycle, as US economic data and the current macro picture indeed point to a pivot. Thus, it is more than likely that we have reached a terminal rate.

“While it (the Fed) does not rule out further strictures, it emphasizes steps that have already been taken and the delay before their effects are felt. Ultimately, the softening of the statement resembles the communication shift in June 2006. appeared when, after several rate hikes, the rate also reached 5.25% and remained at that level for 15 months,” economists at Commerzbank AG said in a note on May 3.

Inflation, which has been an unwavering focus of the Fed over the past year, is finally starting to subside. US headline Consumer Price Index (CPI) inflation moderated for the ninth consecutive month, coming in at 5% year-on-year in March, the lowest reading since May 2021. This includes expectations of long-term inflation in the economy. Stay well.

The transmission of the Fed’s so far tight policy has begun. A rise in lending rates and tighter credit conditions will impact aggregate demand and economic activity and consequently curb price pressures in the economy. But as the Fed acknowledged, “it will take time to feel the full effects of monetary restraint, particularly on inflation.” ,

While inflationary pressures are easing, US economic momentum is also softening. Most of the interest rate-sensitive sectors like housing are already groaning under the burden of sharp rise in interest rates. As credit conditions continue to tighten, spill-over to other areas could materialize.

The recent banking sector turmoil in the US since March has resulted in higher loan costs and tighter lending conditions for households and businesses. According to the Fed, “These tighter lending conditions are likely to have an impact on economic activity, hiring and inflation.” In short, this is the goal of monetary tightening.

Back home, the Reserve Bank of India (RBI) put the brakes on monetary tightening in April after raising rates six times in a row since May last year. At the same time, the RBI governor insisted that the pause was just for that meeting and was not a pivot, while the central bank retained its stance of “holding back the accommodation”. Inflation, the RBI may also be nearing the end of its rate hike cycle. A liberal bent in the Fed’s language, bellwether in the current monetary tightening spree, makes it all the more compelling.