US Fed pauses hike cycle after 10 straight increase

The US Federal Reserve has set out the terminal level for its policy interest rate by pausing its hiking cycle after 10 straight increases and suggesting two more lie ahead. This would push up the federal funds rate to a range of 5.5-5.75%. Fed chair Jerome Powell admitted to tighter credit conditions following the collapse of a clutch of regional banks in the US. The central bank’s communication through this hawkish pause is delicate. It accepts that the battle is not done yet with inflation at over twice the target rate. It is also an admission that US banking regulation has not been up to speed.

The Fed’s interest rate hikes have not loosened the US job market enough – it is still feeding inflation. The intensity of an eventual US recession will be mild as the Fed holds interest rates up for longer. This is good news for the world economy, India included. Capital market volatility should ease as US interest rates plateau. A mild US recession averts a deeper crisis in global trade. The world has more time to adapt to an era of high interest rates. Currency movements stabilise on predictable capital and trade flows. A pause in rate hikes by the lender of last resort influences central bankers everywhere.

Monetary policy synchronisation should endure, which is remarkable during these times of geopolitical conflict and fragmented trade. Central banks will take a cue on cutting rates from the Fed, which, on current expectations, is likely to turn its cycle in 2024 and reach steady state in 2025. Without further shocks to financial markets, this is likely to be the period for the real economy to adjust to credit costs. Diminished financial market turbulence, brought on by the Fed’s inaction, will aid world economic recovery.