CIBC Private Wealth
May 04, 2023
Fed raises rates as it stays focused on growth and inflation
As widely expected, the US Federal Reserve (Fed) raised the target range for the federal funds rate by 25 basis points (bps)—bringing it to 5%-5.25%.
The Fed neither confirmed nor denied if there are plans for additional rate hikes this year and confirmed it will monitor incoming information to decide whether more increases are needed. CIBC Capital Markets feel this may suggest further rate hikes could be on hold for a while, but only time (and data) will tell. The Fed hopes to achieve a maximum inflation rate of 2% over the longer run. If the data starts to lean towards stronger-than-expected growth and inflation, additional rate increases may be required.
CIBC Capital Markets also confirms yesterday’s interest rate increase reflects new uncertainties over the US banking system, which the Fed describes as "sound". However, at the same time acknowledges that tighter credit conditions (including higher interest rates) could weigh on both growth and inflation to an uncertain degree.
Aaron Young, Vice-President, Global Fixed Income at CIBC Asset Management says the Fed continues to face the difficult task of fighting inflation while trying to avoid further breaks to the banking system and a deep recession. "Given this difficult balancing act, interest rate volatility should persist, offering opportunities to take advantage of changes in the shape of the yield curve to add value for our investment strategies."
As the economy needs time for inflation pressures to halt, CIBC Capital Markets expects to see little or no growth in Q2, inflation signals to continue to moderate and the first ease on interest rates to likely only come in 2024.
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