HomeFinanceBankingAfter the release of inflation data, it appears likely that the Fed...

After the release of inflation data, it appears likely that the Fed will raise rates again

English

Traders and investors suggest that the upcoming inflation rate forecast indicates a significant increase in prices, which may necessitate the Federal Reserve (Fed) taking action in May. This could potentially be followed by a projected pause, as expected by market participants.

Following the news of inflation easing in March, a number of economists and investors believe that the Federal Reserve will increase interest rates once more in May before stopping.

“Given the strong performance of major equity indexes, higher consumer confidence in March, robust payroll growth, and a low unemployment rate, it is likely that the Fed will raise the federal funds target by another quarter percentage point at their next meeting in May,” said Bill Adams, the chief economist at Comerica Bank.

He also stated that this would probably mark the end of the cycle, as indicated in the Fed’s March dot plot, which forecasted that the federal funds rate would be between 5.1% to 5.6% by the end of the year.

Don’t overlook: Although financial turmoil has decreased, there are still risks to be aware of

At present, the rate fluctuates between 4.75% and 5%, having been increased by the central bank in March 2022 from a range of 0% to 0.25%. While the consumer price index increased by 0.1% in March, slowing down from a 0.4% rise in February, it rose by 5% year-on-year, the lowest since May 2021 and down from 6% in February. Although this represents an improvement, inflation remains above the Fed’s target of 2%.

“Core inflation is still too high despite the slowing of total inflation, as last year’s spikes in gasoline and food prices are no longer included in the year-over-year comparison,” according to Comerica’s Adams. In March, core inflation, which excludes food and energy, rose 0.4% from February, resulting in an annualized rate of 5.4%.

However, the month-on-month increase decreased from 0.5% in February.

These inflation figures present a mixed picture but suggest that they are strong enough to prompt the Fed to raise rates once more.

Meanwhile, the employment figures for March show a mixed trend. While nonfarm payrolls increased by 236,000 from February, indicating a solid number in normal times, it represents the lowest reading since December 2020. On the other hand, the unemployment rate decreased from 3.6% in February to 3.5% in March, nearly reaching the 53-year low of 3.4%.

Financial instability has consequences

Last month, the financial system experienced turmoil, resulting in three US bank failures. This led to a tightening of financial conditions, which effectively aided the Fed’s efforts. Fed Chairman Jerome Powell noted that this turmoil could have the impact of a rate hike or more. However, in recent days, the financial instability has subsided, providing the Fed with less incentive to delay a rate increase.

Fed likely to raise rates by 0.25% in May, but hiking cycle nearing its end, says Goldman Sachs executive

According to Alexandra Wilson-Elizondo, co-head of multiasset-portfolio management at Goldman Sachs Asset Management, unless there are indications of financial strain prior to its May 2-3 meeting, the Fed is likely to increase rates by 0.25%.

However, Wilson-Elizondo believes that the hiking cycle is closer to its conclusion than its inception due to mounting concerns regarding financial stability and the predicted deceleration of economic growth as credit conditions tighten.

The interest-rate futures market implies that traders anticipate a quarter percentage point increase in May, followed by a pause before a rate cut in September.

While the first two parts of this scenario are sensible, Federal Reserve Chairman Jerome Powell stated in March that there would be no rate cuts this year, and contradicting his statement may not be prudent.

In summary

After the release of inflation data, economists and investors predict that the Federal Reserve will increase interest rates once more in May before halting further hikes. The CPI rose 5% year-on-year in March, the lowest since May 2021, but core inflation remained too high.

Despite mixed signals from inflation and employment numbers, traders expect a 0.25% rate increase in May, followed by a pause before a potential cut in September.

However, Goldman Sachs Asset Management’s co-head of multiasset-portfolio management, Alexandra Wilson-Elizondo, believes the hiking cycle is close to its end due to concerns about financial stability and slowed economic growth.

English

RELATED ARTICLES

LEAVE A REPLY

Please enter your comment!
Please enter your name here

spot_img

Most Read

Precious Metals Data, Currency Data, Charts, and Widgets Powered by nFusion Solutions