Home Finance Fed may raise rates and signal a break in the tightening cycle

Fed may raise rates and signal a break in the tightening cycle

The Federal Reserve is anticipated to increase interest rates on Wednesday and possibly indicate a break in its 14-month pulling cycle as policymakers weigh the need to restrain inflation against a number of urgent risks, including the likelihood of a U.S. debt default as early as next month.

Investors predict that the U.S. central bank will raise interest rates by a quarter of a percentage pt at the conclusion of its most recent two-day policy conference.

The policy statement will be made public at 2:00 p.m. EDT (1800 GMT), and Fed Chair Jerome Powell will address the media 30 minutes later.

However, a number of risks that have become more incompatible will need to be balanced between in the new statement and Powell’s clarification of it.

The economy itself appears to be slowing, three recent bank failures have now raised concern about a much broader issues in the financial sector, and the unresolved nature of debt limit discussion between Republicans in Congress & the Democratic-pulling White House could result in an acute crisis if the U.S. govt is forced to st

After one more rate hike, which is anticipated at this week’s meeting, brings the Fed’s benchmark nightly interest rates to the 5.00%-5.25% range, 10 of the 18 Fed policymakers said they were probably ready to stop raising rates as of March.

The Fed is expected to at least leave open the possibility that this boost will be the last of the present tightening cycle, barring a future inflation surprise, given that consensus and other issues that have worsened in the interim.

Policymakers this time had to evaluate the collapse of First Republic Bank and may determine if the financial sector might face broader turmoil or is likely to make credit even much less accessible and way more expensive than the Fed feels is necessary to lower inflation.

This was similar to how the central bank had to deal with the fallout from the downsides of Silicon Valley Bank & Signature Bank at its conference on March 21–22.

This time, the cost of raising rates may be that Powell has to adopt a lesser forward-leaning tone when speaking of prospects for additional tightening during the following meeting, as shared by Krishna Guha, former New York Fed official who took the position of vice chairman of Evercore ISI, in a written note prior to the policy decision.

The Federal Open Market Committee, which sets interest rates, recently updated its policy statement, which as of March stated that the central bank now anticipates that some extra policy firming may be proper in order to attain a hold of monetary policy that is adequately restrictive to lower inflation, will provide the first cues about the Fed’s direction.

This statement is consistent with what officials stated in economic estimates presented at the meeting in March, when they anticipated at least one additional rate increase.

When the Fed changed tack in a situation where it had been hiking borrowing costs in 2019 alongside 2006, it swapped language siding to the direction of bolder rates for more ambivalent guidance, stating, for example, in June 2006 that the timing and magnitude of any extra firming will depend on the development of both the inflation as well as economic growth outlooks.

People believe the FOMC is likely to reduce its forward guidance on extra rate hikes, according to HSBC analysts, especially now that the policy rate following this meeting will reach the peak most Fed officials had predicted. Rate increases have been ingrained in the Fed’s statement since January 2022.

A hawkish tilt towards more dangerous rate hikes that the Fed wouldn’t want to close off but also may want to guarantee may be implied by acting otherwise.

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