Federal Reserve chair Jerome Powell said on Wednesday the failure to raise the US government debt ceiling would be unprecedented and have highly uncertain and negative effects on the economy. Powell also said the Fed still views inflation as too high, and said it was too soon to say the rate hike cycle is over.

Experts take

Franklin Templeton CEO sees Fed stoking private credit demand

Private credit will keep stepping up as the banking system — stung by the pace of the Federal Reserve’s interest-rate hikes — pulls back on lending, said Jenny Johnson, president and chief executive officer at Franklin Templeton.

“The pace at which these rate hikes have happened has caused stress in the banking system,” she said.

Jay Woods, chief global strategist at Freedom Capital Markets

Woods said storm clouds still linger, Powell gave us what we expected, but he didn’t really give investors the language that said everything is clear and smooth sailing ahead. The regional banking crisis isn’t over. Despite what Powell said, he didn’t give us any guidance as to what the next moves from the Fed will be or an “all clear” signal. He didn’t panic about regional banks, but he didn’t reassure investors either.

Eric Winograd, senior US economist at AllianceBernstein

Winograd said to be clear, the Fed still has a tightening bias: They will need confirmation from the data that the stance of monetary policy is sufficiently restrictive. That confirmation will eventually take the form of slower inflation, weaker job growth and/or weaker lending activity from the banking sector. In the meantime they are still talking in terms of possible rate hikes, which they view as more likely than rate cuts for the time being. At least tentatively, however, the Fed believes that they may have done enough to bring inflation back down over time, consistent with the expectations reflected in the dot plot released in March.

Zhiwei Ren, portfolio manager at Penn Mutual Asset Management

Ren said the rate decision meets market expectation — it leans a little on the hawkish side because there is no signal of a pause.

Matt Maley, chief market strategist at Miller Tabak + Co.

Maley said it was interesting that he contradicted what the Fed staff said in the Beige Book, but it was also interesting that he did not say they were wrong

He said what I would have expected when he said a mild recession is possible, but didn’t see a big one. The Fed Chair never admits to a full recession until we’re already in one.

Lindsay Rosner, multi-sector portfolio manager at PGIM Fixed Income

Rosner said that our view is for a technical recession, when is the question mark, but likely Q3/Q4. If Powell just laid out the framework they are operating under is one of modest growth, not recession, it would suggest they need to change their course if they see a recession. That is why we believe they will have to cut. 

Torsten Slok, chief economist of Apollo Global Management, on Bloomberg TV 

Slok said it’s still this incredible laser focus on inflation. And I do think that inflation in round numbers at 5% is still way too high relative to the 2% target. So they’re still looking in the rearview mirror and saying: “We just don’t know quite yet how bad this banking crisis is going to be and we just don’t know, therefore, how much credit conditions are going to tighten.”

Adam Phillips, managing director of portfolio strategy at EP Wealth Advisors

Phillips said despite some arguments for a pause going into this meeting, Chair Powell once again garnered unanimous support for another 25 basis point hike. 

Future policy decisions likely won’t be as clear-cut, and the Fed is keeping its options open for now.

Gina Bolvin, president of Bolvin Wealth Management Group 

Bolvin said evidently Powell thinks the economy is strong enough to continue to tighten. A key takeaway is the vote was unanimous. 

Sonia Meskin, head of US macro at BNY Mellon

Meskin said (Powell’s) data assessment broadly reflects the view of limited success on inflation/labor market front but more work to be done, either through keeping policy tight for some time or raising rates further if inflation momentum does not broadly abate and if financial conditions allow, through of course he wouldn’t say the latter explicitly. 

Whitney Watson, global co-head and co-CIO of fixed income and liquidity solutions at Goldman Sachs Asset Management

Watson said from a tactical perspective, we think market-implied pricing for policy easing later this year has room to unwind further. Structurally, we think higher yields and a world of greater uncertainty create a strong case for investors to restore allocations to high-quality core bonds. 

(With inputs from Bloomberg)