Tim Hext: The end of interest rate hikes may finally be near

The Fed has finally signalled it’s ready to pause rate hikes. Meanwhile we’re all watching for the next signs of stress after almost 5% in a year, says Pendal’s head of government bond strategies TIM HEXT

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IT’S now been a year since the US Federal Reserve started hiking rates.

Since then the pace has been relentless, with a total of 4.75% of hikes in nine meetings.

At every opportunity, the Fed’s message has been “more are coming” and “rates need to be higher to contain inflation”.

Finally, the Fed today gave some hope the end of hikes is getting close, leaving the door open to a pause shortly.

As expected, the Fed today hiked 25 basis points to a target range of 4.75% to 5%.

The accompanying statement also featured a softening of language.

Future hikes no longer “will” be needed but now “may be appropriate”. Finally, the door is ajar for a pause.

The rest of the statement contained the usual language around a strong commitment to returning inflation to the 2% objective.

The “dot plot” – which shows where the 11 members of the rate-setting Federal Open Market Committee think rates are going – suggests one more hike this year, peaking at 5.125%.

The consensus is 4.4% for the end of next year and 3.25% at the end of 2025. Neutral is viewed as 2.4%.

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Economic projection revisions were small. GDP was lowered slightly to 0.4% for this year despite a strong Q1.

No wonder recession risks and concerns remain high.

Response to banking wobbles

Chair Jay Powell’s press conference contained some interesting insights.

Despite maintaining a brave face, it seems this month’s banking wobbles did rattle the Fed.

We learned a pause was on the table for this meeting amid potentially tighter credit conditions.

The European Central Bank’s logic in hiking 50 basis points last week – that to resist would suggest lack of confidence in the banking system – was not at play here.

Market response

Bond markets rallied modestly on the FOMC statement but were given a decent boost by Powell’s comments.

US 10-year yields are back below 3.5% and near the lows from last week’s turmoil, despite the banking crisis having passed (for now).

Markets are now well ahead of the Fed, pricing in almost 1% of cuts by year end.

US two-years are sub 4%, indicating rates nearer 3% than 5% next year.

What’s next?

We are now all on “break watch”.

Where will we see the next signs of stress after almost 5% of hikes in a year?

The field is wide open. Commercial property, private equity and the non-bank financial sector are a few of the areas that thrived in the zero-rate environment.

A largely fixed-rate loan market in the US has dampened the impact of the hikes so far – but that will end.

Equities have largely taken it all in their stride. Stresses may be offset by lower rates, meaning it may be a case of picking the sector winners and losers more than the overall market direction.

About Tim Hext and Pendal’s Income & Fixed Interest boutique

Tim Hext is a Pendal portfolio manager and head of government bond strategies in our Income and Fixed Interest team.

Tim has extensive experience in banking, financial markets and funding including senior positions with NSW Treasury Corporation (TCorp), Westpac Treasury, Commonwealth Bank of Australia, Deutsche Bank, Bain & Co and Swiss Bank Corporation.

Pendal’s Income and Fixed Interest boutique is one of the most experienced and well-regarded fixed income teams in Australia.

The team won Lonsec’s Active Fixed Income Fund of the Year award in 2021 and Zenith’s Australian Fixed Interest award in 2020.

Find out more about Pendal’s fixed interest strategies here

About Pendal Group

Pendal is a global investment management business focused on delivering superior investment returns for our clients through active management.

In 2023, Pendal became part of Perpetual Limited (ASX:PPT), bringing together two of Australia’s most respected active asset management brands to create a global leader in multi-boutique asset management with autonomous, world-class investment capabilities and a growing leadership position in ESG.

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