Was the Federal Reserve’s Big Decision on rate hikes really a decision at all?

By George Prior

The US Federal Reserve’s ‘big decision’ on interest rates was not really a decision at all, says the CEO of one of the world’s largest independent financial advisory organizations, after the US central bank announced a quarter point hike on Wednesday.

Nigel Green of deVere Group’s comments follow Fed Chair Jerome Powell confirming a widely expected 25-basis point hike at the conclusion of a two-day monetary policy meeting.

The deVere CEO says: “Expectations on what would be the outcome of the meeting have been shifting throughout the month.

“After Powell told a Senate committee earlier in March that inflation was still too high, expectations went from 25 basis points to 50 basis points.

“But then, days later, with the collapse of Silicon Valley Bank and Signature Banks, sparking fears about a banking crisis and a potentially global negative impact, some commentators expected no rate increase in March based on the news.

“The Fed’s dilemma of taming stubbornly high inflation without setting light to the banking system and causing financial instability has been dubbed as ‘The Big Decision.’

“However, we are of the opinion there was not rally a Big Decision here. If they did more than 25bps, it could trigger more instability and to do nothing could be seen as negligent.”

He added that the Fed must proceed with caution, stating that mistakes of the past are coming back to haunt the US central bank.

“The Fed didn’t act quickly enough to tame inflation from the beginning. They resisted raising interest rates from near-zero levels for most of 2021, even as prices began shooting up due to pandemic-related supply chain snarls, Covid outbreaks and a persistent labour shortage, amongst other issues,” he notes. “This all leads to sky-high inflation – and especially wage inflation.”

It would seem that the Fed hasn’t learned the lessons from the 1980s.

“During much of the 1970s, the US central bank refused to roll out rate hikes, probably due to political pressure from leaders unwilling to allow higher unemployment on their watch.

“Of course, this made workers keep asking for ever higher salaries, which forced businesses to keep increasing prices to compensate, and which led to the infamous 1980’s wage-price spiral and the recession.”

In a media statement on Monday, Nigel Green said that investors are now ready to build their investment portfolios with new money amid a growing consensus that looser monetary policies from the Fed and other major central banks are coming which will boost financial markets.

It came after the Federal Reserve, the Bank of England, Bank of Japan, Bank of Canada, the European Central Bank and Swiss National Bank all vowed to keep credit flowing in the serious issues affecting the banking sector, showing that they are willing to do whatever it takes to avert a crash.

“Investors are taking this as a sign that central banks will now ease off interest rate hikes. Looser monetary policies will trigger a surge in financial markets.

“Not wanting to miss out on the next rally, clients are now telling our consultants around the world that they want to build-up their investment portfolios with new money,” he said.

About:

deVere Group is one of the world’s largest independent advisors of specialist global financial solutions to international, local mass affluent, and high-net-worth clients.  It has a network of offices across the world, over 80,000 clients and $12bn under advisement.