Possible Hike in Interest Rates, Amid Growing Risks to the US Economy

Via Syndicated Feed

Cover Image Attribute: Front entrance of the Marriner S. Eccles building built in 1937, Creator: Britt Leckman | Credit: Official Federal Reserve Photo, Copyright: U.S. government work

The Federal Reserve is expected to increase interest rates despite the presence of growing economic risks.

On May 3, the Federal Reserve is anticipated to increase interest rates and possibly indicate a break in its 14-month tightening policy cycle. This decision comes as policymakers weigh the importance of curbing inflation with various risks, including bank failures and the potential for a U.S. debt default in the coming month. As a result, investors expect the U.S. central bank to increase interest rates by a quarter of a percentage point at the end of its two-day policy meeting. 
The policy statement is set to be issued at 2 p.m. EDT (1800 GMT), and Fed Chair Jerome Powell is scheduled to address reporters thirty minutes later. However, the upcoming statement and Powell's explanation of it will need to address a series of risks that have become increasingly conflicting.
The pace of inflation has been declining slowly, which has caused some Fed officials to doubt whether interest rates have been raised enough to manage it effectively. Furthermore, the economy is weakening, while recent bank failures have raised concerns about the financial sector's broader troubles. Additionally, the uncertain nature of discussions on the debt limit between Republicans in Congress and the Democratic-controlled White House could lead to an acute crisis if the U.S. government cannot meet its obligations.
As of March, 10 out of 18 Fed policymakers suggested that they were likely to stop increasing rates after one more hike. This last increase, anticipated at this week's meeting, is expected to bring the Fed's overnight benchmark interest rate to the range of 5.00%-5.25%.
Given the consensus among policymakers and other challenges that have emerged, it is probable that the Fed will, at a minimum, suggest the possibility that this rate hike will be the last of the current tightening cycle unless inflation unexpectedly spikes in the future.
Just as the central bank had to grapple with the consequences of Silicon Valley Bank and Signature Bank's failures during the March 21-22 meeting, policymakers, this time, had to assess the implications of First Republic Bank's collapse. They had to determine whether the financial sector was facing more significant turmoil and whether credit would become even less accessible and more expensive, which could exacerbate inflation.
Krishna Guha, former New York Fed official and current vice chairman of Evercore ISI, noted that the tradeoff for proceeding with a rate increase at this time "may be that Powell has to adopt a less forward-leaning tone in terms of prospects for additional tightening at the following meeting" in a note issued before the policy decision.
According to Wilmer Stith, who manages bond portfolios for Wilmington Trust, the Fed is likely to maintain flexibility based on current economic data. Stith cited the robust inflation readings, especially in the services sector, and the most recent figures from the employment cost index as indications that the economy remains resilient. The employment cost index indicated that employee compensation and benefits increased by 1.2% during the first quarter of this year, equating to an annualized growth rate of 4.8%. This rate was higher than the 1.1% rise seen in the final quarter of last year.

Federal Open Market Committee's New Policy Statement; A Shift in Strategy

The Federal Reserve's plans will be initially revealed through the Federal Open Market Committee's new policy statement, which stated in March that the central bank expects that further policy tightening may be necessary to achieve a monetary policy stance that is sufficiently restrictive to reduce inflation. The phrase used in the FOMC's policy statement in March was consistent with the economic projections outlined at that meeting, which indicated that at least one further interest rate hike was likely. 
In previous instances when the Fed altered its course from raising borrowing costs, such as in 2019 and 2006, it changed its language from leaning towards higher rates to more neutral guidance. With rate increases already embedded in the Fed's statement since January 2022, analysts believe the Fed will likely soften its forward direction on additional rate hikes, particularly as the policy rate is expected to reach the highest level that most Fed officials had forecast. Doing otherwise may suggest a hawkish stance towards more rate hikes, which the Fed may not want to commit to.
IndraStra Global Staff has not edited this story, which is auto-generated from a syndicated feed.

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