The US Federal Reserve, on September 20, 2023, decided to keep its benchmark interest rates unchanged after 11 hikes since March 2022. This decision was in line with expectations as the central bank opted to maintain the federal funds rate at a range of 5.25% to 5.5%, the same level as it announced in July. The Fed’s decision is part of the central banks’ ongoing efforts to navigate the economic landscape and contain inflation to 2% in the long run.

“The US Fed delivered a hawkish hold, with an upward revision to their expectations of growth and labour markets. This allowed the Fed to preserve the option to hike once more this year at the meetings in November or December…and reduce the number of rate cuts it expects to deliver in 2024 and 2025,” said Ray Sharma-Ong, Investment Director, Multi-Asset Solutions, at Abrdn. 

According to him, after the recent US Fed rate decision, treasury yields appear appealing. Ong informs that they can remain elevated as the financial markets engage in discussions about whether the Fed will maintain its current stance for the remainder of the year.

“We expect US equities to trade in a choppy manner with US growth surprising on the upside, as markets focus on growth contraction risks, given high policy rates and tighter credit conditions,” he adds. 

Meanwhile, Jack McIntyre, Portfolio Manager at Brandywine Global, recommends characterising the Federal Reserve’s interest rate decision as either a ‘hawkish pause’ or simply a ‘pause,’ underscoring the absence of a ‘dovish pause’ in the equation.

“While the Fed kept a lot the same, holding the target range for rates steady and keeping the longer-term rate at 2.5%, there was a significant change. The Fed removed some rate cuts next year in its dot plot, so markets are correctly reading a less dovish outlook with rates that are higher for longer,” McIntyre stated. In addition, he informs that the Fed expects more growth but less inflation, and this Goldilocks scenario, if it plays out, would be good for risk assets. 

“The key point of this meeting is how the Fed sees a first victory over inflation while acknowledging how the war on it is not over just yet,” opines Florian Ielpo, Head of Macro and Multi-Asset Portfolio Manager at Lombard Odier Asset Management. 

He points out that as long as financing conditions remain sufficiently stringent over an extended duration, it sets the stage for 10-year real interest rates to stay firmly tethered at approximately 2%, with the possibility of occasional fluctuations as the market adjusts to the reduced likelihood of rate cuts.