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Onwards or upwards?

market snapshot

28 July 2023 |
The US Federal Reserve raised its benchmark interest rate to reach a 22-year high this week.

Fast reading:

  • The Fed raised its benchmark rate by 25bps on Wednesday to a new target range of 5.25% to 5.5%. The move followed a pause in hiking in June, amid a dip in inflation.
  • The ECB raised rates by 25bps to 3.75% on Thursday, pushing the benchmark rate up to its highest ever level.
  • Investors are now asking if the two leading central bank hiking cycles are over.

Markets headed higher on Thursday despite the US Federal Reserve’s latest 25bps hike1, as investors bet the central bank’s aggressive hiking campaign could be at an end.

The Federal Open Market Committee’s (FOMC) decision on Wednesday means the US interest rate is now at its steepest level since 2001. In a statement, however, Fed Chairman Jerome Powell did not rule out a further hike in September when the committee next meets, if conditions warrant it.

The US economy beat expectations and experienced a growth surge in Q2, according to data released on Thursday by the Bureau of Economic Analysis2. Real Gross Domestic Product (GDP) grew at an annualised rate of 2.4% (see Figure 1), resulting in part from an increase in consumer spending, and demonstrating strong economic activity despite rising rates.

Figure 1: US real GDP – % change from the previous quarter

A middle ground

For Susan Hill, Senior Portfolio Manager and Head of Government Liquidity Group, the latest Fed hike is a sign the central bank is taking the middle ground on rates, as analysts debate the best way forward.

“Economic growth is more robust than expected and inflation is declining at an uncertain pace —both of which argue for tighter monetary policy. But the Fed is mindful of another uncertainty — the timing of the lags with which monetary policy affects economic activity,” she says.

“If the Fed was successful at accelerating the transmission of policy with its rapid pace of hikes last year, then it certainly has not got the impact that it desired. But, if the lags are more traditional – 12 to 18 months, if not more, for example – then a wave of policy restriction has yet to hit. This is more likely, as policy only stopped being accommodative in the second half of last year. Therefore, this compromise make sense – the Fed is open to more tightening but will allow the upcoming data to show the way forward.”

This compromise make sense – the central bank is open to more tightening but will allow the upcoming data to show the way forward.

For Lewis Grant, Senior Portfolio Manager for Global Equities, investor focus is increasingly turning to fundamentals rather than on the direction of monetary policy.

“Much of the market has been driven by macro sensitivities, but earnings season has taken the microphone from the vaulted halls of the Federal Reserve and handed it to CEOs in their glass-backed board rooms,” he says. “So far CEOs have not disappointed, with a few surprise misses and beats driving headlines, but the underlying theme is one of general resilience in what has been a difficult time for the economy.”

Against a still-rocky macroeconomic backdrop, the Fed’s latest move is an unsurprising one, Grant believes.

“Though inflation and unemployment are moving in the right direction, the situation is far from comfortable. The target inflation rate of 2% remains distant. Expectations of a recession to control stubborn inflation are held at bay by a strong labour market,” Grant says. “As long as inflation continues to ease, we agree with the consensus of another 25bps rate hike this year and a pause until Q2 2024. However, there are many potential ‘gotchas!’ ahead, and we will keep a keen eye on inflation figures in particular – any surprises there could cause a shock.”

How do you balance this environment? “The balance sheet fortresses and exposure to advances in tech have made mega-cap growth companies a lucrative hedge to a softened macro environment,” according to Grant.

“But, as we begin to tilt towards a fundamental-driven market, the opportunity pool widens and some of the beaten-up smaller and mid-cap growth names start to become attractive.”


The European Central Bank (ECB) raised rates by 25bps to 3.75% on Thursday3. This pushes the benchmark up rate to its highest ever level, a peak last reached in 2001 when the central bank was trying to pump value into the newly launched euro currency.

The decision comes after the latest data showed headline inflation down to 5.5% in June – still well above the ECB’s target of 2%. In parallel to the US inflation picture, speculation abounds around the central banks’ next move.

July inflation figures for the Eurozone will be released on Monday.

For more insights on the Fed, please watch our latest video insight: A tale of two indices | Federated Hermes Limited (

1 The Financial Times, as at 26 July 2023.

2 The Bureau of Economic Analysis, as at 27 July 2023.

3 The Financial Times, as at 27 July 2023.

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