The Federal Reserve of the United States is expected to raise interest rates by 25 basis points, to a range of 5% to 5.25%, the highest level since 2007. The FOMC meeting will take place on May 2-3, and Fed Chairman Powell will make the announcement on May 3.
If the quarter-percentage-point rate hike on Wednesday, May 3, goes through, it will be the US Fed’s tenth consecutive rate hike. However, the markets may have already discounted that. The markets want to hear from Powell that the central bank would take a break to assess the impact of previous rate hikes.
The upcoming Fed meeting is critical because markets may turn volatile if policymakers hike rates by 25 basis points as per expectations but do not signal a halt.
The case for another Federal Reserve interest rate hike this week is strengthened by two important measures that revealed consistent US inflation pressures in recent months.
According to a Commerce Department report released on Friday, the personal consumption expenditures price index excluding food and energy, the Fed’s favoured indicator of underlying inflation, up 0.3% from the previous month and 4.6% from a year earlier in March. Although the core gauge is seen as a better indicator of the trend, the Fed targets 2% based on a broader measure.
The Fed also pays close attention to the Labour Department’s measure of employment expenses, which rose 1.2% in the first quarter compared to the prior quarter, defying expectations.
Anna Wong, Chief US Economist at Bloomberg LP says, ““The data strongly support another 25-basis-point hike in the May 2-3 meeting, and may even persuade some Fed policymakers that rates are not yet at a sufficiently restrictive level. Our baseline is for the Fed to go on an extended pause after next week’s hike, but we now see a growing risk that they may need to do more.”
Inflation still remains stubborn and the risks to the economy are rising especially after the breakout of the banking crisis. A prolonged higher interest rate scenario impacts credit advances thus impacting economic growth.
After a rate of 25 bps on May 3, will the US Fed refrain from hiking rates in the next FOMC meeting on June 13-14 FOMC meeting remains to be seen. Until then, markets will be eagerly awaiting comments from Fed Chairman Powell and other Fed officials regarding potential rate rises or a pause.
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