Singapore equities may still gain as Fed steps up pace of rate hikes

SINCE March 2022, the Federal Reserve has already raised interest rates twice. The central bank kick-started the current rate hike cycle by raising rates 25 basis points (bps) in March, followed by a 50 bps rate hike in May – the steepest increment since the year 2000.

More importantly, Fed minutes indicated that the central bank is likely to step up the pace of rate hikes, which could see rates go as high as 2 per cent this year. In addition, it has plans to reduce the size of its balance sheet by up to US$95 billion per month starting in June, which should further tighten financial conditions. Prior to the March meeting, Fed officials were much less hawkish, only signalling about 3 to 4 rate hikes this year.

This dramatic shift in interest rate policy comes as the Fed is now more attuned with the reality that inflation is no longer transitory, and that higher prices are here to stay. In April, consumer prices showed little signs of cooling, rising by 8.3 per cent year-on-year – exceeding all estimates. There has also been a noticeable uptick in services inflation, as spending shifts from goods to services with the reopening of the economy.