Fed Projects Interest Rates to Soar to 14-Year High, No Indication of Future Hikes Despite Inflation Concerns

•  Shai.Gal

•  May 03 2023
 

The Federal Reserve has decided to increase interest rates by 0.25%, a decision that was reached unanimously. This marks the first time that the Fed has raised rates by only 0.25% after a series of larger increases, including some of 0.5% or more. As a result of this latest move, interest rates are expected to reach a range of 5.00% to 5.25%.

Powell has suggested that interest rate hikes may be postponed, and that any future hikes will depend on the impact of previous increases on the economy, as well as financial developments. Additionally, Powell stated that the Fed's current forecast does not support a cut to interest rates, and warned against the implementation of stricter credit conditions. He went on to express confidence in the strength and durability of the US banking system, stating that avoiding a recession is a more likely outcome than entering one.

The decision of the Fed's Open Market Committee (FOMC) suggests that the round of interest rate hikes may have ended, not by what was explicitly stated, but rather by what was left out. Notably, the committee's senior officials omitted the sentence "The committee estimates that additional policy tightening may be necessary," which was included in the previous interest rate decision statement.

"No decision was made today to stop" Powell said, but emphasized that the decision to remove from the interest rate announcement the reference to additional tightenings in the future is significant.

This was received in the market as a hint that the hike was coming to an end. At the press conference, the chairman clarifies that this may be true, but it depends on the data. In other words - if inflation returns to the islands, the bank will very quickly return to a restraining policy.

Federal Reserve Chairman Powell emphasized that the Fed will be prepared to take action if necessary, stating, "Moving forward, our strategy will be data-dependent in determining whether further restrictive measures are needed."

Regarding inflation, he stated, "It has remained significantly above the bank's target of 2% for an extended period of time. While it has moderated to some extent since the middle of last year, inflationary pressures persist. There is still a considerable journey ahead before we can achieve our goal of bringing inflation back to the 2% target."

Despite the inflation rate remaining above the Fed's 2% target, there are indications of a potential easing of prices in the second half of the year, as key economic indicators such as private consumption and service prices have slowed down. Furthermore, the decrease in loans resulting from recent bank collapses is also expected to contribute to a slowdown in economic activity, as mentioned by senior officials at the bank in previous statements.

While inflation remains significantly below the Fed's target, a closer examination of the statement reveals a somewhat less severe tone than in previous communications.

Please note that the article should not be considered as investment advice or marketing, and it does not take into account the personal data and requirements of any individual. It is not a substitute for the reader's own judgment, and it should not be considered as advice or recommendation for buying or selling any securities or financial products.

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