In its latest meeting, the Federal Reserve raised its policy rate by a quarter of a percentage point to 4.75%-5%, pushing borrowing costs in the world’s largest economy to their highest level since the 2007/2008 global financial crisis. Futures contracts on the Fed funds rate suggested that many traders expected this decision, although some believed the Fed should have paused. What was not priced in though, was interest rate guidance. Investors were convinced that the collapse of two US regional banks and the takeover of Credit Suisse by UBS would prompt the Fed to err on the side of caution and cut rates later this year. Instead, the bank maintained its terminal rate expectations at 5.125%, while ruling out a cut this year on the grounds that the US banking system is sound and resilient. Fed chairman, Jerome Powell, argued that the collapse of SVB is not representative of the US banking system. He reiterated that rates would be raised further if necessary.
Price stability remains the priority of central banks. Inflation remains elevated, and in the US, economic data shows resilience, despite some cracks here and there. CPI data from the Eurozone and South Africa indicate that inflation trended upwards in February, and the ECB maintained its hawkish stance. Following UK inflation data that was higher than expected, the Bank of England is expected to tighten policy. The SARB is also expected to hike by 25bps next week. The central banks still have a long way to go to reach their inflation targets, and optimal strategies must be implemented to do so.