• Thu. Jun 8th, 2023

The US Federal Reserve is expected to raise its benchmark lending rate for a tenth – and possibly last – time on Wednesday as it continues its fight against high inflation.

The U.S. central bank is expected to make the move despite growing signs of a slowing U.S. economy, with many economists predicting the U.S. 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 them high in a bid to bring inflation back towards its long-term target of 2% without cause a deeper and more painful recession.

“We expect the Fed to hike 25 basis points next week and signal a pause in June, with little upward bias for rates going forward,” Bank of America economists wrote in a note on Friday. to customers.

Another rate hike on Wednesday would mark the Fed’s tenth straight rate hike, taking the benchmark to between 5 and 5.25%, its highest level since 2007.

More than 80% of futures traders also expect the Fed to raise interest rates another 25 basis points, according to data from the CME Group.

– Banking turbulence –

The Federal Open Markets Committee (FOMC) meeting responsible for setting rates on May 2-3 will be held under very different circumstances than the previous one in March, which took place amid a brief and sharp banking crisis triggered by the rapid collapse of Silicon Valley Bank (SVB) a few days earlier.

SVB’s rapid demise after taking on excessive interest rate risk raised concerns about banking contagion, which were amplified by the collapse of New York-based Signature Bank days later.

Amid ongoing turmoil in the banking sector, the Fed delayed a larger rate hike on March 22, opting instead for a quarter-point hike.

Concerted efforts by US and European regulators in the wake of SVB’s collapse helped calm financial markets and appear to have averted further high-profile casualties in the banking sector.

“With tensions easing in credit markets, Fed officials are expected to move forward with a 25 basis point rate hike at the early May meeting,” the US economist wrote in Oxford Economics chief Michael Pearce in a recent note to clients.

But despite calmer financial markets, the collapse of SVB nevertheless had a lasting impact on the banking sector, with banks tightening lending conditions in the weeks that followed.

Fed officials noted that the tightening of lending conditions could act as an additional rate hike, possibly reducing the number of hikes needed to bring inflation back to 2%.

Fed Governor Christopher Waller said in mid-April that “a significant tightening of credit conditions could make further monetary policy tightening unnecessary.”

But he cautioned against “making such judgment” before good data on the effect of the financial crisis and bank lending comes out.

US regulators admitted on Friday they could have done more to prevent the collapse of SVB and Signature Bank; the Fed also called for tougher banking rules in the future.

– One and done? –

Recent US economic data points to a slowing economy, with growing predictions that the US will enter recession later this year.

Data released in late April showed economic output slowed to an annual rate of 1.1% in the first quarter of this year, while the Fed’s favored measure of inflation fell to an annual rate of 4.2%. % in March, against 5.1% a month earlier. .

The growing impact of the Fed’s rate hike campaign on the economy has led analysts and traders to predict that the Fed will likely stop raising rates after Wednesday’s decision.

With the quarter-point hike widely expected, the focus next week will instead be on “any changes to the guidance language in the statement” from the Fed, Deutsche Bank economists wrote in a recent note. to customers.

“Although our base case remains that the May rise will be the last in this cycle as the economy reacts to the tightening so far, we see risks tilted towards a further rise in June,” they said in the statement. note.

Fed Chairman Jerome Powell suggested after March’s interest rate decision that the Fed might raise rates just one more time before ending its current hike cycle.

His comments supported the median interest rate projection for 2023 by FOMC officials.

Minutes from the March FOMC meeting indicated that the Fed expected the United States to 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)


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