United States Raises Interest Rates Again to 5.25%, But Hike


The Federal Reserve has decided to increase interest rates by a further 0.25% to 5.25%, the highest it has been in 16 years as it battles higher inflation, but the US central bank also signaled that its rate-raising cycle may be coming to an end.

In its 3rd May meeting the Federal Open Market Committee (FOMC) approved the tenth rate rise in just over a year, in what was a unanimous decision. However, there was a clear change of language over what might happen at the Committee’s next meeting on 14 June, with language hinting at further hikes taken out. In a statement following the announcement, the FOMC said that there could be “additional policy firming may be appropriate to return inflation to 2% over time.”

Overall, the Committee says it will arrive at future decisions by factoring in the cumulative tightening of monetary policy, and the time lags from the policy moves, and how they eventually affect economic activity, and more importantly, inflation.

During a press conference, Fed Chairman Jerome Powell did say that no decision on a rate pause had been made, but also that the change in the statement’s tone was “meaningful”.

Most forecasts were that there would be a 0.25% rate rise, so there was little surprise when the latest increase was disclosed.

With just hours to go before the rating announcement, the CME FedWatch Tool, where respondents are asked what they believe the next rate decision will be, revealed that 82.2% expected that there would be a 0.25% rate hike.

Interestingly, despite the suggestion by Powell and the FOMC that rate increases could be paused, an overwhelming 96.3% have now said that they expect no hike to be made next month.

The FOMC reiterated its desire to see inflation return to its 2% target, but there was no forecast on when this could be expected to happen.

Prices in the United States have been falling for six consecutive months, with annualized inflation at 5% in March.

There are fears the United States is heading towards a recession after recent data showed that the economy had grown by an annualized 1.1% in the first quarter of this year. This was down on the third and fourth quarters of last year, which saw annualized GDP growth at 3.2% and 2.6% respectively.

It was noted by the FOMC that growth has begun at a modest pace in 2023.

Banking giants ING have said that it expects that interest rates have now reached a ceiling in the United States and predicts that the rate will remain unchanged at the Fed’s next meeting in June.

Looking ahead, the bank expects rate cuts later this year as recessionary forces build.

This forecast is based on the slowing of inflation, and evidence of mounting job losses.

ING also argued that historically the Fed does not leave it too long before it cuts rates, as over the past 50 years the typical period between the last hike in a rate-raising cycle and the initial rate cut has only been six months on average.

Despite deepening concerns over the state of the banking system, the FOMC said that the banking sector in the United States is “sound and resilient”.

This is despite shares in many regional banks falling after the collapse of the First Republic bank which was bought out by JP Morgan.

Richard Carter, head of fixed interest research at Quilter Cheviot, said: “The Federal Reserve raised interest rates in March amidst the uncertainty surrounding the failures of Silicon Valley Bank and Signature Bank, and JPMorgan’s recent acquisition of First Republic has brought a sense of relief to the banking sector, but the risks may not entirely be in the rearview mirror so opting to continue rate hikes will have been carefully considered. Banks are still grappling with losses on long-term securities, which could affect their lending decisions and force them to be cautious over the next few weeks.”

As the possibility of a rate pause beginning has increased, the US Dollar lost ground to its main currency rivals. This is in line with the bearish long-term trend in the USD, which might now reasonably be expected to be more likely to continue.

The GBP/USD currency pair rose to reach a high at $1.2593 before selling off a bit during the London session.

The EUR/USD currency pair also rose to reject its key resistance level at $1.1089, but at the time of writing, had given up all its post-hike announcement gains.

The major US stock market indices are all trading a bit lower.

Buka akaun dagangan patuh syariah anda di Weltrade.
Source link

Related Articles

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button