Is this the Fed's last hike?

On 1 May, the Federal Deposit Insurance Corporation seized First Republic Bank in the early hours of the morning and immediately sold the bulk of its assets and deposits to JPMorgan Chase, bringing an orderly, government-engineered end to the second-largest bank failure in American history. Two days later, Jerome Powell’s Federal Open Market Committee announced another 25-basis-point increase in the federal funds rate, lifting the benchmark target range to 5.00 to 5.25 per cent. Yet the true significance of the May FOMC meeting was not the rate hike itself, but what was missing from the committee’s official policy statement: the explicit phrase anticipating that "additional policy firming may be appropriate" had been cleanly excised.

The subtle deletion of that single forward-guidance sentence marks the definitive conclusion of the fastest tightening campaign since the era of Paul Volcker. In 500 basis points of cumulative hikes, the Fed has driven policy rates from absolute zero to the highest level in sixteen years.

The Conditional Pause

The omission of forward-leaning tightening language signals that the committee has officially entered a conditional pause. Central bankers want to step back and observe the cumulative impact of their previous actions, particularly the severe credit contraction unfolding across regional banking corridors.

However, Jerome Powell took pains during his press conference to insist that a pause is not a pivot. The Fed is not preparing to cut rates; it is merely setting the anchor at 5.25 per cent to let real interest rates grind higher as inflation decelerates.

The Higher-for-Longer Grind

Equity markets that celebrated the end of hikes are prematurely celebrating the start of easing. With core inflation remaining uncomfortably sticky above 5 per cent and the labour market still producing hundreds of thousands of jobs, the Fed cannot entertain rate cuts without inviting a second wave of inflation.

The bar for future hikes is now high, but the bar for rate cuts is even higher. The Federal Reserve has reached its terminal summit at 5.25 per cent, but investors celebrating the end of rate hikes are about to discover that standing at the peak of restrictive monetary policy is just as punishing as the climb.