What to Expect from the Federal Reserve’s 10th Consecutive Interest Rate Hike

The Federal Reserve is expected to announce another interest rate hike, which would be its 10th consecutive rate rise.[0] The rise would take the benchmark interest rate to a range of 5% to 5.25%. The Fed is prioritising the fight against rising prices, which have been stubbornly high. While the vast majority of investors believe that the Fed will raise rates, only a quarter of futures traders believe the rate hike will be the last.[1] Although it is possible that the central bank may hold rates above 5% for the rest of the year, the underlying numbers do not back this assumption.[1]

The Fed’s rate hike decision is expected to be announced on Wednesday. However, the big question is what officials may signal about another potential tightening on June 14.[2] According to fed funds futures traders, there is an 80% probability that the central bank will increase its benchmark lending rate by a quarter point on Wednesday.[3] If the Fed did not follow through with the rate hike, it would startle markets and lead more people to believe rates would go up in future periods.[4]

The Fed sees reigning in inflation as its number one priority, but it is moderating.[5] Consumer price inflation, which peaked at 9% on a year-over-year basis last June but has slowed to 5% this March, is expected to be just over 3% by the end of this year.[5] This is according to Moody’s Analytics, and at the Fed’s 2% target by spring 2024.[5] There is growing confidence that inflation will reach the Federal Reserve’s desired target.[5] The job market is easing, the banking system is fragile, and this all means the Fed should pause its rate hikes.

Investors are even pricing in a significant easing in monetary policy beginning this summer.[5] In fact, this would align with the gloomy predictions made by the Federal Reserve’s economists.[5] According to the minutes of the March Federal Open Market Committee meeting, Fed staff economists now project a mild recession starting later this year.[5]

The Federal Reserve’s guidance is at odds with the current market expectations.[6] In 2023, the Federal Reserve anticipates the Federal Funds rate to reach 5.1%, aligning with predictions of a rise in May followed by a period of stability.[6]

Moreover, if the Federal Reserve pauses rate hikes, mortgage rates could drop and spur another homebuying run, according to housing experts.[7] A confirmation of a pause could put downward pressure on long-term bond yields, and homebuyers could see some mortgage rate relief.[8]

The Fed will prefer to leave the door open to more tightening on paper by switching its language from “some additional policy firming may be appropriate” to “additional policy firming may yet be appropriate” in the upcoming statement instead of switching to a fully data-dependent approach, which would signal that rates have peaked.[9]

Federal Reserve Chairman Jerome Powell has said repeatedly that consumers should not expect a reduction in interest rates soon.[10] Many economists and investors predict that the Federal Reserve’s policymaking committee will either suspend its series of rate increases on Wednesday or at its June meeting. However, Powell is coming under mounting pressure to signal that the period of rate increases is over, despite inflation proving more stubborn to bring down than anticipated.[11]

The Fed has to continue hiking until unemployment rate increases, and the asset price bubbles deflate, which includes the real estate prices and the stock prices.[6] If not, the inflation rate is not decreasing.[6] The alternative is to abandon the 2% inflation target, but that is unlikely at this point.[6]

It remains to be seen whether the Fed’s aggressive tightening will have additional deleterious spillover effects. It is safe to say that the Fed is not disappointed with the current macroeconomic trend. The Fed’s decision will be released at 2 p.m. in Washington, followed 30 minutes later by Chair Jerome Powell’s press conference.[12] This week, the Fed will not be disclosing any revised predictions or projections regarding rates and the economy.[13]

0. “Fed to raise interest rate again amid core inflation pressure” The Guardian, 3 May. 2023, https://www.theguardian.com/business/2023/may/03/fed-to-raise-interest-rate-again-amid-core-inflation-pressure

1. “Markets keep assuming the Federal Reserve’s next rate hike will be the last” Washington Examiner, 2 May. 2023, https://www.washingtonexaminer.com/opinion/markets-keep-assuming-the-federal-reserves-next-rate-hike-will-be-the-last

2. “What the Fed’s 2006 playbook signals about a rate hike” Axios, 3 May. 2023, https://www.axios.com/2023/05/02/what-fed-playbook-signals-rate-hike

3. “Live updates: Markets await Fed rate decision amid banking turmoil” CNN, 3 May. 2023, https://www.cnn.com/business/live-news/stock-markets-banking-fed-rate-announcement/index.html

4. “Why the Fed will likely raise rates two days after First Republic failed” CNN, 2 May. 2023, https://www.cnn.com/2023/05/02/business/fed-rate-hike-banking-crisis/index.html

5. “Opinion: It makes no sense for the Fed to raise interest rates this week” CNN, 3 May. 2023, https://www.cnn.com/2023/05/03/opinions/fed-interest-rates-banking-crisis-zandi/index.html

6. “The Fed Likely To Hike In May, June And July To 5.75% (SP500)” Seeking Alpha, 28 Apr. 2023, https://seekingalpha.com/article/4597783-fed-likely-to-hike-may-june-july-to-5-75-percent

7. “Falling rates could spur homebuying in San Bernardino” Spectrum News 1, 2 May. 2023, https://spectrumnews1.com/ca/la-west/business/2023/05/01/if-rates-fall–there-could-be-a-home-buying-frenzy-in-san-bernardino-s-high-desert

8. “May 2023 Fed meeting: What will a rate hike mean for mortgage rates?” USA TODAY, 3 May. 2023, https://www.usatoday.com/story/money/2023/05/03/will-mortgage-rates-rise-with-fed-rate-hike/70174099007/

9. “FX Daily: What to watch as the Fed hits the peak” ING Think, 3 May. 2023, https://think.ing.com/articles/fx-daily-what-to-watch-as-fed-hits-the-peak/

10. “How much did interest rates rise? See mortgage, cars loans” USA TODAY, 2 May. 2023, https://www.usatoday.com/story/graphics/2023/05/02/interest-rates-increase-mortgage-cars-loans/70169700007/

11. “US rate hike expected despite crisis of confidence after third bank failure” Sky News, 3 May. 2023, https://news.sky.com/story/us-rate-hike-expected-despite-crisis-of-confidence-after-third-bank-failure-12871834

12. “US dollar analysis: Fed poised to hike, but will it be the last?” FOREX.com US, 1 May. 2023, https://www.forex.com/en-us/news-and-analysis/us-dollar-analysis-fed-poised-to-hike-but-will-it-be-the-last/

13. “What to watch as U.S. Federal Reserve readies to pause with one last hike” BNN Bloomberg, 3 May. 2023, https://www.bnnbloomberg.ca/what-to-watch-as-fed-readies-to-pause-with-one-last-hike-1.1915141