Client Update - 3rd February 2023

As we head into February it has certainly been a better start for the markets in 2023 than we saw last year. On Wednesday the US Federal Reserve (Fed) Chair Jerome Powell duly raised interest rates by a further 0.25%, however that was expected and the real focus was on his statement that followed. In a statement after the decision, the Fed said “ongoing increases in the target range will be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 per cent over time”.

Ok, the firm stance on fighting inflation was expected, but what he said next was more interesting. Powell said that he expected at least two more rate hikes in 2023 before a possible pause. He said that he expected the Fed to raise rates as much as it thought prudent before pausing and did not expect to pause and then raise further at a later date. This suggests that once the pause comes, the next possible movement of interest rates could be lower. It was also heartening to hear him describe that the disinflation process has started. We saw a strong rally in technology markets yesterday on the back of this statement, despite soft earnings reports from Apple and Google.

Closer to home the Bank of England and the European Central Bank (ECB) went a little harder at inflation, raising rates by 0.5%, but again this was expected as inflation has proved slower to fall in the Eurozone with such a heavy reliance on external sources of energy production. Europe has had to buy a lot of Liquified Natural Gas to cope without Russian gas supplies, whereas the US has a large supply of natural energy from its own shores. The ECB even went as far as confirming another 0.5% rise in March.

The full effect of interest rate rises to date will have some time to fully feed through to the economic outlook and the central banks are well aware of this. Jerome Powell also stated that “we will need substantially more evidence to be confident that inflation is on a downward path. Shifting to a slower pace [of rate rises] will better allow the committee to assess the economy’s progress toward our goals.” With investors hoping for a Fed pivot at some time in 2023 (to start cutting interest rates), for now we have what is being described as a pirouette. The markets seem happy with this for now, and therefore so are we. Do have a good weekend.