Fed expected to hike rates, hinting at a pause in the tightening cycle

  • Fed Policy Statement at 2:00 p.m. EDT (6:00 p.m. GMT)
  • Markets expect a quarter percentage point rate hike
  • Fed’s Powell will hold a press conference

WASHINGTON, May 3 (Reuters) – The Federal Reserve is expected to raise interest rates on Wednesday and possibly signal a pause in its 14-month tightening cycle, as policymakers balance the need to slow inflation against to a pressing set of risks ranging from bank failures to the possibility of a US debt default as early as next month.

Investors expect the U.S. central bank to follow up with a quarter-percentage-point rate hike at the end of its latest two-day policy meeting. The policy statement is expected to be released at 2 p.m. EDT (6:00 p.m. GMT), with Fed Chairman Jerome Powell due to address reporters half an hour later.

But the new declaration, and Powell’s elaboration on it, will have to reconcile a set of risks that have turned more into conflicts.

Inflation has come down only slowly, leaving some Fed officials skeptical that interest rates have risen enough to really control it; Yet the economy itself appears to be weakening, a trio of recent bank failures have raised concerns about broader issues in the financial sector, and the volatile nature of debt limit talks among Republicans in Congress. and the Democratic-controlled White House could trigger an acute crisis if the US government is forced to stop paying its bills.

In March, 10 of 18 Fed policymakers signaled they were likely ready to halt rate hikes after another hike, expected at this week’s meeting, takes the interest rate overnight. the Fed’s benchmark day at the 5.00% to 5.25% range.

Between this consensus and other issues that have intensified in the meantime, the Fed is likely to at least open the door to the prospect that this hike will be the last in the current tightening cycle, in the absence of a future inflationary surprise.

Just as the central bank faced at its March 21-22 meeting the fallout from the failures of Silicon Valley Bank and Signature Bank, policymakers this time had to assess the collapse of First Republic Bank and determine whether the financial sector is facing broader turmoil. , or is likely to make credit even less accessible and more expensive than what the Fed believes is necessary to rein in inflation.

The trade-off for moving forward with a rate hike this time “may be that Powell needs to adopt a less forward-leaning tone in terms of prospects for further tightening at the next meeting,” Krishna Guha, a former official from the New York Fed who is now vice chairman of Evercore ISI, wrote in a note ahead of the policy decision.


Clues to the Fed’s direction will first come from the new policy statement from the Federal Open Market Committee responsible for setting rates, which in March said the central bank “expects that further tightening of policy might be appropriate in order to achieve a monetary policy stance that is tight enough” to bring inflation down.

That sentence is consistent with what officials described in the economic projections released at the March meeting, when they saw at least one more rate hike in the cards.

In 2019 and 2006, when the Fed shifted gears in an environment where it had raised borrowing costs, it traded language leaning towards higher rates for more neutral orientations – stating in June 2006 for example that “ the extent and timing of any further firming…will depend on how the outlook for inflation and economic growth evolves.”

With rate hikes written into the Fed’s statement since January 2022, “we believe the FOMC is likely to ease its guidance on further rate hikes,” HSBC analysts wrote, particularly now that the rate director after this meeting will rise to the top of most Fed officials. had planned.

To do otherwise could imply that those projections have changed, a hawkish tilt toward more rate hikes that the Fed won’t want to shut down but also won’t want to underwrite.

Reporting by Howard Schneider; Editing by Paul Simao

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howard schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and economics, graduated from the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, business reporter and local Washington Post staffer.

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