This week saw the release of the much-anticipated inflation figure for May in the US and the Federal Reserve’s (Fed) latest decision on interest rates.
On Tuesday, we got confirmation that inflation continues to trend lower in the States, with inflation in the year to May at 4%, having been 4.9% in April. This was marginally lower than economists’ expectations of 4.1%. The annualised rate now sits at its lowest level since March 2021 and illustrates that the rapid interest rate hiking cycle seen over the last 12 months is starting to take effect.
The new data provided relief for the market, which continues to buy into the perhaps ‘Goldilocks’ narrative that inflation can fall back gradually without the need for a protracted recession and corresponding increase in the unemployment rate. The sectors most sensitive to interest rates were bright, with mega-cap technology stocks continuing their strong start to the year.
On Wednesday, the Fed released its latest decision on interest rates. With the expectations in recent weeks that the Fed would pause at this meeting, following the reassuring inflation data the day before, this policy action looked nailed on. This proved correct, and after ten consecutive increases, the Fed chose to pause, noting that holding rates at the current level “allows the committee to assess additional information and its implications for monetary policy.”
In the press conference that followed, Jerome Powell was keen to stress that the future path for interest rates remains uncertain and stopped well short of declaring victory over inflation. He did signal that further increases may be necessary later in the year, but a number of economists are predicting this will not be required and that the Fed has, in fact, already reached the “terminal rate” in this hiking cycle.
Next week, attention turns closer to home with our latest inflation data due Wednesday and the Bank of England (BoE) announcing interest rates on Thursday. With our inflation rate over double that of the US, it is hoped that this data point will see a sharp fall in the annual rate, but expectations remain that the BoE will once again tighten monetary policy and increase interest rates.
John Naylor, Chartered FCSI – Head of Investment Committee