Market expects Fed to pause rate hikes

A pause in monetary tightening? The Monetary Committee of the Federal Reserve meets this week and could, for the first time since March 2022, maintain its benchmark interest rate to avert the risk of a recession, despite inflation that remains strong.

“I think we will see a pause next week,” Lydia Boussour, an economist at EY, told AFP. The analyst considered that there is “sufficient support” for that among the members of the FOMC, the monetary policy committee of the US central bank.

That “would allow us to look at more data before making decisions about the extent” of the additional increases needed, Philip Jefferson, one of the governors of the county, recently explained. fed and future vice president of the entity if the Senate confirms his nomination.

Since March 2022, the Fed’s policy rate has risen 5 percentage points, to be in a range of 5.00-5.25%.

These increases lead banks to raise their own rates, thus moderating consumption and investmentwhich reduces the pressure on prices.

After ten consecutive climbs, Fed officials, who will meet Tuesday and Wednesday, want to take time to observe the effects of the tightening on the economy. Above all, they want to keep the specter of a recession away.

More than two-thirds of market players anticipate a pause, according to CME Group.

The Fed’s decision will be announced on Wednesday at 2:00 p.m. local time in Washington (18:00 GMT), in a statement. The president of the central bank, Jerome PowellHe will then give a press conference.

– And then? –

The debates in the committee are looking tough: “The vote for a pause is unlikely to be unanimous, with some ‘hawks’ likely to disagree,” says Gregory Daco, chief economist at HEY.

The economy of USA it resists rate hikes better than expected, and appears to be too strong for prices to stop rising in a lasting manner.

Inflation moved up again in April, according to the Fed’s favorite PCE index, which reported a 12-month price rise of 4.4%. On Tuesday, coinciding with the first day of the Fed meeting, the consumer price index (CPI) will be known, which could tip the balance to one side or the other.

In the labor market, moreover, the shortage of manpower – which puts upward pressure on wages – persists, although the situation improves.

Job creation in May was above expectations, but so was the unemployment rate -a factor highly considered by the Fed to assess the impact of its rate hikes-, rose more than expected, to 3.7%.

Requests for unemployment benefits at the beginning of June are the highest since October 2021.

A pause would not mean rate hikes stop. For Boussour, the fed “It will send the message that this is not the end of the adjustment cycle.”

A new rate hike from the next meeting, at the end of July, is “on the table”, according to the specialist.

Diane Swonk, chief economist at KPMG, expects the Fed to “review its interest rate hike trajectory” and anticipate “higher rates for even longer.”

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