US Fed policy: FOMC may deliver a rate hike, here's what is prompting the hikes
3 min read . Updated: 03 May 2023, 10:58 PM IST
PremiumUS inflation eased for the ninth consecutive month in March to 5%, however, came in below market estimates. Inflation is still above the Fed's target of 2%.
US Federal chairman Jerome Powell and other committee members of the Federal Reserve are likely to deliver a quarter-point hike in key rates on Wednesday. This is expected to be the final hike of the aggressive rate hike cycle that began in early 2022.
FOMC's 2-day meeting which started from 2 May and the outcomes will be announced on 3 May.
US inflation eased for the ninth consecutive month in March to 5%, however, came in below market estimates. Inflation is still above the Fed's target of 2%.
The high inflation rate, coupled with the banking stresses are leading to a tightening of lending conditions which may impact economy.
The Fed's minutes of the March meeting hinted that inflation was 'unacceptably high' and that a 'period of below trend growth (was)needed' to get it back to the 2% target.
In the previous policy, despite two regional banks Silicon Valley and Signature Bank's failure on American soil, the Fed raised key funds rates by 25 bps in the range of 5% to 5.25%. This is the highest level in federal fund rates since 2007.
Hence, it is expected that Fed may hike rates in this session.
"As of today, there is a 90% probability of a 0.25% rate hike while a 10% probability of a pause. The economic data announcements around CPI inflation look comfortable while unemployment which is a lagging indicator is still reflecting strength. The GDP growth had slowed down in Q1 and has increased the claims for US economic recession. We are also continuing to see stress in the US banking system with names like PacWest Bancorp, Western Alliance Bancorporation, Metropolitan Bank Holding Corp, and Homestreet Inc correcting 15-25% in yesterday’s trade," said Divam Sharma- Founder at Green Portfolio PMS.
"The inflation continues to remain sticky while the room with Fed to fight it with rate hikes is very less. We also have elections coming up in the US in 2024 and a recession would be the last thing the Democrats would want. We believe that like the RBI, the Fed will also take a pause this time with a wait-and-watch stance," he added.
Meanwhile, Normura's report highlighted that Fed's weekly H4.1 data suggests that the amount of banks borrowing through emergency facilities stayed at elevated levels. Banks’ emergency borrowings from the Fed rose for a second consecutive week, up $11.3 billion to $155.2 billion the week ending 26 April, signaling that significant stress remains in the system.
With the collapse of First Republic Bank this week and just like for Silicon Valley Bank and Signature, a lifeline has been pumped into thelender through a government-initiated deal. This time it is JPMorgan Chase at rescue by agreeing to acquire First Republic's substantial majority of assets including approximately $173 billion of loans and approximately $30 billion of securities.
Rates on credit cards, mortgages and auto loans, which have been surging since the Fed began raising rates last year, all stand to rise even more. The result will be more burdensome loan costs for both consumers and businesses.
The Fed’s goal is to slow consumer spending, thereby reducing demand for homes, cars and other goods and services, eventually cooling the economy and lowering prices.
Fed Chair Jerome Powell has acknowledged in the past that aggressively raising rates would bring “some pain" for households but said that doing so is necessary to crush high inflation.
Even before the Fed’s latest move, credit card borrowing had reached the highest level since 1996, according to Bankrate.com.
The most recent data available showed that 46% of people were carrying debt from month to month, up from 39% a year ago. Total credit card balances were $986 billion in the fourth quarter of 2022, according to the Fed, a record high, though that amount isn’t adjusted for inflation.
Since the Fed began raising rates in March 2022, the average new-vehicle loan rate has jumped from 4.5% to 7%, according to Edmunds data. Used vehicle loans dropped slightly to 11.1%. Loan durations average around 70 months — nearly six years — for new and used vehicles.