“When is the next Fed meeting?” is a question that hasn’t weighed this heavily on anxious investors’ minds in probably four decades.
Which is fair enough, really. The worst inflation to hit the U.S. economy in 40 years peaked nearly a year ago, and yet the Federal Reserve remained committed to its most aggressive campaign of interest rate hikes since the late Carter and early Reagan administrations.
After all, who can forget that rising interest rates sparked turmoil in the banking sector? Silicon Valley Bank and Signature Bank failed, Credit Suisse (CS(opens in new tab)) was forced into the arms of competitor UBS (UBS(opens in new tab)) and First Republic Bank had to be rescued by JPMorgan Chase (JPM(opens in new tab)).
There’s a saying on Wall Street that the Fed stops hiking rates when something breaks. The proximate cause for SVB’s collapse was a classic bank run. But what spooked depositors in the first place was the fact that SVB had so much of its capital essentially trapped in Treasury bonds, the prices of which fall when interest rates rise.
Meanwhile, the economic data aren’t conclusively helping the case for lower interest rates – even as rate increases put stress on the banking sector and threaten to push the economy into recession.
Inflation cooled moderately in April, with prices rising by less than 5% on an annual basis for the first time in two years, according to the CPI report(opens in new tab). The slower rate of inflation, which came in below economists’ expectations, should theoretically give the Federal Reserve room to pause its long campaign of interest rate hikes.
But experts say the CPI report doesn’t exactly give the Fed a slam-dunk case for putting rate hikes on hold.
“The CPI report continues to depict inflation that is just too high for most people’s good, especially the Federal Reserve’s,” said Rick Rieder, BlackRock’s(opens in new tab) chief investment officer of Global Fixed Income. “In fact, the report showed that inflation remains remarkably sticky, which doesn’t correspond to virtually any practical thinker’s timeline of when inflation might be expected to start to come down further.”