Fed debates between continuing to raise rates or taking a breather

The members of the Federal Open Market Committee of the Federal Reserve Americans begin a meeting on Tuesday in which they will decide if the ten rate increases carried out in the last year are enough or if it is necessary to continue raising them.

While on previous occasions the rises were expected by most analysts, this time there is no consensus on what is going to happen. The Fed will report the decision tomorrow, Wednesday, and its president, Jerome Powell, will explain it at a press conference.

Although the uncertainty surrounding the meeting is the sentiment of the majority of economists, this Tuesday a piece of information was released that could tip the balance towards a pause in the increases: the interannual rate of inflation fell considerably in May, nine tenths, to stand in the 4%its lowest level since March 2021.

This is the second steepest drop in the consumer price index since it began to decline eleven months ago, although the figure is still far from the Fed’s target for 2%.

For this reason, most experts estimate that the ceiling that interest rates can reach has not yet been reached and that there will be more increases this year, although they see a possible temporary pause at this meeting in June and a possible new increase in July.

According to Federated Hermes senior fixed income portfolio manager Orla Garvey, the Fed is expected to announce a pause tomorrow and resume rate hikes in July and September.

“Our view is that we are nearing the end of the current hike cycles and while further hikes are possible, the larger and far-reaching question is how long central banks will stay at their terminal level and , subsequently, when and to what extent they will be cut ”, he said in a statement.

Following ten consecutive increases, beginning in March 2022, the rate currently ranges from 5% and the 5.25%, the highest level since mid-2007.

The last increase, of a quarter of a point, was announced on May 3. As learned after the publication of the minutes of the meeting, the participants mostly expressed uncertainty about the appropriateness of further tightening monetary policy.

Some members of the Fed’s Federal Open Market Committee (FOMC) were in favor of continuing with the increases due to the slow rate at which inflation is falling in the country.

Other members of the body, however, considered that “It would not be necessary” tighten monetary policy further if the economy continues to move in the direction of their estimates.

According to the technical team that prepares the central bank’s projections, the US economy will slow down over the next two quarters and could enter a slight recession at the end of 2023, before picking up pace and beginning to recover.

In a survey of economists by the Financial Times and the Kent A Clark Center for Global Markets at the University of Chicago Booth School of Business, experts also forecast that there will be at least two more quarter-year interest rate hikes. point this year.

Thus, of the 42 economists surveyed between June 5 and 7, the 67% forecast that the rate will peak between 5.5% and the 6% this year.

Faced with runaway inflation as a result of the pandemic and Russia’s war against Ukraine, the Fed began raising rates on March 17, 2022. It did so with 25 basis points and rose 50 more in May.

Then he started to step on the gas and made four 75 basis point climbs. In December he raised a half point and this year he began to slow the pace with three 25 basis point hikes.

Rumors of a relaxation of the rhythm became more present after the uncertainty unleashed in the banking system by the bankruptcy of Silicon Valley Bank (SVB) and Signature Bank and the rescue of First Republic Bank.

Although the causes of the bankruptcy are extensive, the investigation into what happened suggests that its financial situation worsened due to the Fed’s monetary policy. Despite the fear that the crisis could spread for the moment, it has not happened, after the rapid reaction of the US authorities.

Source: EFE