The Fed has decided to go over the 5% interest rate and then maybe take a breather

The Federal Reserve on Tuesday kicks off a policy meeting that is expected to push interest rates to their highest level in nearly 16 years, reaching a potential plateau that will test the economy in a way not seen since the start of the financial crisis in 2007.

This will be the second Fed meeting following the failure of a major US bank, with JPMorgan’s takeover of First Republic Bank on Monday marking the latest evidence that the central bank’s historic rapid hike in rates is being felt in the system financial and potentially beyond it.

Global central banks are now moving towards a potential stopping point for rate hikes after aggressively tightening credit conditions to stem the worst wave of inflation in 40 years. The Fed meeting will be followed by rate hikes expected on Thursday by the European Central Bank and the Bank of England next week.

But the Fed is further along in the process and may signal that this week’s rate hike is the last, at least for now. A pause can allow time to see how the economy adjusts to higher borrowing costs and tougher banking conditions, and whether inflation eases.

Much remains uncertain. The economy is showing signs of continued strength as well as signs of a slowdown. Inflation has gradually eased, with the price index the Fed still controls more than double the central bank’s 2% target.

Bank lending has stabilized after falling about 1.7% in mid-March following the bankruptcies of Silicon Valley Bank and Signature Bank, but a lending survey scheduled for this week’s meeting should signal tighter conditions for the future.

Given the tensions, “our base case scenario remains that May’s rally will be the last of this cycle as the economy responds to the squeeze so far,” said Matthew Luzzetti, chief US economist at Deutsche Bank.

But “we see risks pending for another hike in June. (Fed Chair Jerome) Powell will likely emphasize the continued need for an ‘hawkish’ (aggressive against inflation) bias to contain inflation, but won’t commit in any decision in the June meeting”.

The Fed will announce its monetary policy decision at 3 PM ET on Wednesday. Powell will hold a press conference half an hour later.

The move expected on Wednesday will be the tenth consecutive rate hike since March 2022, a tightening that will see rates rise by as much as 5 percentage points, an average of half a percentage point at each meeting.

The expected 0.25 percentage point increase on Wednesday will bring the rate between 5% and 5.25%.

This is the level that most Fed officials last December and March said they considered a suitable stopping point, high enough to continue slowing inflation without, they hope, causing the economy to slow down further – and more job losses – than necessary.

Source: Terra

Rose

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