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Cash-strapped South African consumers do not have much hope of a repo rate cut this year after the US Fed decided not to change interest rates and maintain the current rate. The Fed chair, Jerome Powell, also completely ruled out interest rate hikes but acknowledged that rates may need to remain higher for longer.
The US Federal Reserve (Fed) kept its federal funds rate at a range of between 5.25% and 5.50% for its sixth consecutive meeting on 1 May in line with expectations, with Powell dismissing the likelihood of an interest rate increase as the next policy action at the June meeting.
“I think it’s unlikely that the next policy rate move will be a hike,” Powell noted.
Adriaan Pask, CIO at PSG Wealth, says the recent statements from the Fed suggest that policymakers are aiming for increased assurance that inflation is on a path towards the 2% target. He also pointed out that Powell noted that while the specifics are not entirely defined, the Fed has not reached that point yet.
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“The Fed finds itself in a difficult position: if it cuts rates prematurely, it risks letting the inflation genie out of the bottle but if it keeps rates too high for too long, economic pain downstream will be more severe. In our view, the harm from a higher interest rate environment is yet to bite and we are likely to see more economic strain from the 2022/23 hikes in 2024,” Pask says.
Tracey-Lee Solomon, economist at the Bureau for Economic Research (BER) at Stellenbosch University, says while the Fed’s monetary policy statement was certainly more hawkish than previous statements this year, relative to market expectations, Powell came across as slightly more dovish.
“Before the meeting there were concerns that not only would the Fed refrain from cutting rates soon but also that it might need to raise rates to curb inflation. Powell’s assertion that current rates were sufficiently restrictive to address inflation and that a hike was unnecessary, citing the need for more time, dispelled such fears.”
She notes that, unlike the past two meetings, there was a noticeable shift in the wording of the Fed’s official statement, acknowledging for the first time that “in recent months, there has been a lack of further progress” toward its 2% target.
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“It is clear that the Federal Open Market Committee (FOMC) no longer views the recent persistence of inflation as a bump in the road. Powell’s post-meeting press conference notably did not provide any forward guidance on the path of interest rate cuts for the year as in prior meetings.
“This shift in communication signals the recent data has pushed the Fed to delay rate cuts further into the year, meaning rates will remain high for longer. However, with this, Powell indicated that a need to hike again would be unlikely, calming market concerns of a more hawkish Fed response.”
Isaac Matshego and Busisiwe Nkonki, economists at the Nedbank Group Economic Unit, says the US Fed’s decision comes on the back of a still tight labour market and sticky inflation. “The Fed reiterated that inflation has stalled in the past few months, with progress towards the 2% target slowing.”
Consequently, its communication has turned increasingly hawkish, with the committee stating that it does not consider it appropriate to cut interest rates until it has grown more confident that inflation is moving sustainably towards the 2% target, they say.
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