Today will mark the beginning of the third FOMC meeting of 2023.
Market analysts anticipate that the Federal Reserve of the United States will increase interest rates by 25 basis points, setting the range at 5% to 5.25%, the highest level since 2007. The FOMC meeting, scheduled for May 2-3, Fed Chairman Powell announcing the decision on Wednesday, May 3rd.
If the US Fed goes through with the quarter-percentage-point rate hike on Wednesday, it will mark their tenth consecutive rate hike. While it is likely that the markets have already priced in the quarter-percentage-point rate hike.
The Decision and Statement
Markets will be looking for Powell to signal if the central bank will take a break to assess the impact of previous rate hikes.
If policymakers increase rates by 25 basis points, as expected, but do not signal a halt, markets may turn volatile. Likely many will be closely watching, and listening, to the statement following the meeting. What Powell says, and what he doesn’t will have a significant impact.
Tone will play a large role in the markets assessment of the decision. So, it will remain to be seen if we get a Hawkish statement from the Fed on inflation. Or if the recent collapse and buyout of yet another regional bank, with JPMorgan taking over First Republic after it was seized by regulators and entered Receivership over the weekend; will cause the Fed to come out more Dovish and signal a pause, or an outright pivot. However, such a response may cause markets to assess the banking crisis to be more deeply entrenched than they would like to admit and cause further issues as depositors flee smaller banks. Which in turn would simply enlarge the underlying problems.
Two important measures have revealed consistent US inflation pressures in recent months, strengthening the case for another Federal Reserve interest rate hike this week. On Friday, the Commerce Department released a report indicating that the personal consumption expenditures price index, which excludes food and energy and is the Fed’s preferred indicator of underlying inflation, increased by 0.3% from the previous month and 4.6% from the previous year in March. Even though the core gauge is regarded as a better indicator of the trend, the Fed targets 2% based on a broader measure.
The Labour Department’s measure of employment expenses, which increased 1.2% in the first quarter compared to the previous quarter, defying expectations, is also closely monitored by the Fed.
The Feds Ever-Growing Balance Sheet
Regardless of the outcome of this FOMC meeting, the Fed will have to contend with a myriad of issues, notably how to deal with an exploding balance sheet that has seen the last 8 months of QT completely wiped out by emergency measures to backstop failing banks. Some analysts see such recent actions as a pivot without officially calling it QE.
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