I reckon this is the last Fed hike you will see!

Well folks, I reckon this is the last Fed hike you will see!

After today’s unanimous 0.25% rate hike by the Federal Reserve, the Fed softened its language similar to what it has done previously before pauses.

They also got rid of “some additional policy firming may be appropriate” and the need to get it “sufficiently restrictive” in their statement, suggesting they have likely reached their destination. As Powell mentioned in his press conference, its clear the Fed now thinks rates are “meaningfully above” neutral rates and in restrictive territory.

The Fed’s mouthpiece in the press, Nick Timiraos of the Wall Street Journal, also thinks the Fed is done after using “language broadly to how officials concluded their interest rate increases in 2006” when it ended its hiking cycle.

While the official tightening may be done, the unofficial tightening continues through:

1. Lagged impact of hikes
2. Ongoing quantitative tightening
3. Credit crunch from U.S. regional banking issues

The Fed is still saying no imminent rate cuts but this is all contingent on (3) above not getting worse. And if market pricing is any guide there could be more U.S. regional banks to go, in particular PacWest which is on the ropes, down -72% year to date (note there are another 5 U.S. regional banks with share prices down more than -40% in 2023 that the market has serious concerns over).

Powell in his press conference noted deposits leaving banks towards the later stages of a rate hiking cycle was normal and we should expect more. He also highlighted that the next Senior Loan Officer survey (due 8th May), which they put together and have more real time insight into, will show further credit tightening than already seen.

JP Morgan’s CEO, Jamie Dimon, thinks there is only one more smaller regional banking domino to fall for this cycle which many believe could be PacWest at circa US$41bil in assets (compared to $229bil for the recently failed First Republic Bank that JP Morgan just bought).

As for market pricing, rates markets took it as incrementally dovish with a Fed’s Funds Rate of 4.19% (about 1% of cuts) now expected by the end of the year compared to 4.4% (more like 0.75% of cuts) just prior to today’s Fed meeting.

Either way, all up, this spells lower long term bond yields which should be a plus for longer duration/high growth stocks. It is also likely a further headwind for the USD (against major basket currencies) as it already is threatening to break down below support levels (DXY Index).

The Fed did keep a small crack in the door to hike again though should inflation remain stickier than they predict.

What do you think, has the Fed hung up its hiking boots?