The Fed is likely to raise rates, signaling a pause in the tightening cycle

  • The central bank’s policy statement is due at 2 p.m. EDT (1800 GMT).
  • Markets expect a quarter percentage point rate hike
  • Fed’s Powell holds news conference

WASHINGTON, May 3 (Reuters) – The Federal Reserve is expected to raise interest rates on Wednesday and signal a pause in its 14-month tightening cycle, as policymakers balance the need to reduce inflation against pressures to stem bank failures. US debt repayment likely as soon as next month.

Investors expect the U.S. Federal Reserve to follow through with a quarter-percentage-point rate hike at the end of its latest two-day policy meeting. The policy statement is due at 2pm EDT (1800 GMT), with Fed Chairman Jerome Powell scheduled to address reporters half an hour later.

But the new report, and Powell’s description of it, should address a set of risks that have grown into a conflict.

Inflation is falling only slowly, and some central bank officials don’t believe interest rates have moved far enough to truly control it; Yet the economy itself appears to be weakening, with a trio of recent bank failures raising concerns about broader problems in the financial sector, and unresolved debt ceiling negotiations between Republicans in Congress and the Democratic-controlled White House could trigger a severe crisis if the U.S. government is forced to stop paying its bills.

As of March, 10 of 18 central bank policymakers indicated they were ready to hold off on a rate hike after one more hike is expected at this week’s meeting, lifting the central bank’s benchmark overnight interest rate to a range of 5.00%-5.25%.

Between that consensus and other issues that have intensified in the meantime, the Fed will at least open the door to the possibility that this hike will be the last of the current tightening cycle, without a future inflation surprise.

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Just as the central bank had to grapple with the fallout from the failures of Silicon Valley Bank and Signature Bank on March 21-22, policymakers this time must assess the collapse of First Republic Bank and determine whether the financial sector is facing broader turmoil. , or credit will be less accessible and more expensive than the central bank thinks it should be to tame inflation.

A move ahead with a rate hike this time around would require “Powell to adopt a less dovish tone based on the prospects for additional tightening at the next meeting,” said Krishna Guha, a former New York Fed official. A vice president at Evercore ISI wrote in a note ahead of the policy decision.

Shifting gears

Clues on the central bank’s direction will come first from the Federal Open Market Committee’s new policy report, which sets rates, and as of March, the central bank expects some additional policy stabilization to be “appropriate to achieve a stance of monetary policy that is sufficiently restrained to reduce inflation.”

That phrase is consistent with what officials outlined in the economic projections released at the March meeting, when they saw at least one additional charge on the cards.

In 2019 and 2006, as the central bank shifted gears in an environment to raise borrowing costs, it changed language leaning toward higher rates for neutral guidance — for example, in June 2006, when it said, “The extent and timing of any additional commitment . . . to the outlook for both inflation and economic growth.” Depends on evolution.”

“We think the FOMC will soften its forward guidance on further rate hikes,” HSBC analysts wrote, as rate hikes remain firm in the Fed’s report from January 2022, especially since the policy rate will hit most central bank officials after this meeting. had predicted

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To do otherwise could signal that those predictions have changed, and a hawkish tilt toward a rate hike that the Fed doesn’t want to shut down but doesn’t want to guarantee.

Report by Howard Schneider; Editing by Paul Simao

Our Standards: Thomson Reuters Trust Principles.

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