The US Federal Reserve is widely expected to raise its benchmark lending rate for the tenth – and possibly final – time on Wednesday, as it continues its fight against high inflation.
The decision is likely to be taken by the US central bank, despite growing signs that the US economy is slowing, with many economists forecasting the US will enter a mild recession later this year.
Analysts and traders expect the Fed to raise interest rates by 25 basis points and then keep inflation higher to get back toward its long-term target of 2 percent without a deeper, more painful recession.
“We expect the Fed to hike rates by 25 bps next week and signal a pause in June,” Bank of America economists wrote in a note to clients on Friday.
Another rate hike on Wednesday would mark the Fed’s tenth rate hike, bringing the benchmark between 5 and 5.25 percent — its highest level since 2007.
More than 80 percent of futures traders also expect the Fed to hike interest rates by another 25 basis points, according to data from CME Group.
– Banking unrest –
The rate-setting Federal Open Markets Committee (FOMC) meeting on May 2 and 3 will be held under very different circumstances than its last one in March, which took place amid the rapid fallout of a smaller, but sharp, banking crisis. Silicon Valley Bank (SVB) a few days ago.
SVB’s rapid demise after taking excessive interest-rate risks raised concerns of a banking contagion, which were exacerbated by the collapse of New York-based Signature Bank a few days later.
Against a backdrop of ongoing turmoil in the banking sector, the Fed held off on a major rate hike on March 22, opting instead for a quarter-point hike.
Concerted efforts by US and European regulators following the collapse of SVB helped calm financial markets and seem to have prevented more high-profile casualties in the banking sector.
“With tensions easing in credit markets, Fed officials look set to move forward with a 25bp rate hike in early May,” Michael Pierce, chief US economist at Oxford Economics, wrote in a recent note to clients.
But despite calm financial markets, the collapse of the SVB has had lasting effects on the banking sector, with banks tightening lending conditions in the weeks since.
Fed officials have noted that tighter loan conditions could act like additional rate hikes, potentially reducing the number of increases needed to bring inflation back to 2 percent.
Fed Governor Christopher Waller said in mid-April that “a significant tightening of loan conditions could eliminate the need for some additional monetary policy tightening.”
But he cautioned against “making such a decision” before good data is published on the impact of the financial turmoil and bank lending.
US regulators acknowledged on Friday that they could have done little to prevent the collapse of both SVB and Signature Bank; The Fed also called for tougher banking rules going forward.
Got another one? ,
Recent US economic data point to a slowing economy, with predictions rising that the US will enter a recession later this year.
Data released at the end of April showed that economic output slowed to an annual rate of 1.1 percent in the first quarter of this year, while the Fed’s favorite inflation fell to an annual rate of 4.2 percent in March, a one-month low. Earlier it was 5.1 percent. ,
The growing impact of the Fed’s campaign of rate hikes on the economy has prompted analysts and traders to predict that the Fed will stop raising rates after Wednesday’s decision.
Deutsche Bank economists wrote in a recent note to clients that with quarter-point growth widely expected, the focus next week “will be on any changes to the guidance language” in the statement.
“While our base case remains that the May hike will be the last of this cycle as the economy is reacting strongly so far, we see risks tilted towards another hike in June,” they said in the note.
Fed Chair Jerome Powell suggested after the March interest-rate decision that the Fed could raise rates just one more time before ending its current hiking cycle.
His comments supported the median projection of interest rates for 2023 by FOMC officials.
The minutes of the March FOMC meeting said the Fed was predicting the US would enter a mild recession later this year when it decided to raise interest rates.
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(This story has not been edited by News18 staff and is published from a syndicated news agency feed)