The Fed's Pause Is Expected To Be Prolonged

In this article, Alain Freymond, our Group Chairman, and Ahmad Saidali, our Group CEO, provide their perspectives on why the Fed will not raise its interest rates further Despite its perceived "hawkish" stance.

Despite its perceived "hawkish" stance, the Fed will not raise its interest rates further

The Fed decided not to change its key interest rates on 20/9, initiating, in our view, a long phase of stability that will soon be seen as the end of one of the swiftest and harshest monetary tightening cycles in its recent history. Between what the Fed chairman cannot say, what he would really like to say, what he thought he should say, what he actually said, what the financial markets heard, what they believed the chairman wanted to say, what they probably thought they understood, and what they inferred regarding the outlook for interest rates, these past few days have undoubtedly been particularly confusing for many.

The bond market ultimately didn't react much, while the stock markets recorded a negative performance for the week amid disorder and confusion. The Fed hinted that rates should remain "higher for longer" to maintain control over inflation, which was initially viewed as a negative factor. However, we believe that the Fed is, in fact, secretly content with having achieved a "soft landing," accompanied by a decline in inflation on all fronts, including the lagging services segment. In parallel with its rate hike policy, the Federal Reserve has also been reducing the size of its balance sheet for several months by selling Treasury bonds, potentially causing long-term interest rates to rise through its sales. While the Treasury increased its debt issuances, the Fed did not hesitate to increase the supply of bonds, thereby reinforcing its restrictive monetary policy.

In this context, as economic indicators increasingly signal weakness in economic activity, we strongly doubt that they genuinely intend to proceed with further rate hikes. Therefore, the coming months are likely to witness a stabilization of key interest rates and a probable flattening of yield curves. The negative reaction of the stock markets to the Fed's announcement appears overly pessimistic to us. We recommend investing available liquidity in bonds and considering the current consolidation in equities as a medium-term positioning opportunity.