PIMCO: US Federal Reserve Reaction

PIMCO: US Federal Reserve Reaction

4 mei 2023

Fed
Rente (03)

By: Tiffany Wilding, PIMCO Managing Director, Economist

What happened? The U.S. Federal Reserve hiked its benchmark rate 25 basis points (bps) and signaled they expect to hold rates steady in June as expected. However, the 'pause language' was somewhat more definitive than expected. Although the Fed preserved the option to continue hiking if needed, they pledged to take account of cumulative tightening to date, monetary policy lags, and financial market developments – all factors that suggest a pause is appropriate.

What should we expect? Today’s rate hike is very likely the last of the rate hiking cycle. Looking ahead, we expect that the drag on real activity of the recent banking sector stress and tighter credit conditions will grow, and eventually contribute to the US following into a modest recession. With the Fed’s action today they signaled that they also see growing downside economic risks, despite still elevated inflation.

Bottom line: Monetary policy is tight, and the effects of tight monetary policy are becoming clearer. Inflation is still elevated, but the outlook has darkened, and the Fed, in an effort to manage downside risks, is now pivoting to a holding pattern.

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