The Fed will decide on interest rates today.

class=”sc-3778e872-0 cKDKQr”>

The US Federal Reserve is about to raise the basic interest rate for the tenth consecutive year in its fight against hyperinflation. The Federal Reserve (Fed) is expected to raise interest rates by another 0.25 percentage point this Wednesday, to the range of 5 to 5.25 percent.

This will be the highest value in 16 years. Experts assume that the most recent bank crash – the collapse of the First Republic Bank – will not prevent the Fed’s decision makers from tightening interest rates further. The question now is whether Fed Chairman Jerome Powell will keep the prospect of a rate cut.

Is the 11th increase coming soon?

In making his decision (2pm local time; 8pm CEST), the Fed has to weigh between calming concerns in the banking sector and tackling high consumer prices. In the past year, the Fed has increased interest rates by an impressive 0.75 percentage points several times. So the Fed set a pace it hadn’t seen in decades.

It kicked off this turnaround in interest rates a good year ago – at the time the base interest rate was almost zero. Recently, however, the central bank has opted for smaller rate hikes. As early as March, the Fed chose a rate hike of 0.25 percentage points. The Fed’s forecast now points to at least one increase in core interest rates for this year.

High consumer prices in the US are proving to be permanent. In its latest forecast for March, the Fed expects an average inflation rate of 3.3 percent for this year. Inflation, which was high in the USA, weakened more than expected in the last period. In March, consumer prices increased by 5.0 percent compared to the same month of the previous year. It was the lowest increase since May 2021. However, both this reading and the full-year forecast are still far from the Fed’s average target inflation rate of 2 percent.

Limited leeway for central banks

Keeping inflation under control is the traditional duty of central banks. If interest rates rise, private individuals and businesses will have to spend more on loans or borrow less. Growth is slowing, companies can’t just get over the high prices, and ideally, the inflation rate is falling. After the last meeting, Powell emphasized that turbulence in the banking sector could have a similar effect on lending. However, this situation also increases the risk of a slowdown in the economy.

Some of the turmoil in the banking industry came from the Fed’s aggressive rate hikes. With First Republic Bank, another embattled US money house is coming to an end. On Monday, it was announced that industry leader JP Morgan Chase took over the troubled bank in a government-coordinated bailout. After the Silicon Valley Bank and Signature Bank collapsed in March, the turbulence initially seemed to have passed.

U-turn soon?

The Fed now needs to manage a stabilizing action in monetary policy – any more significant rate hikes could shake the market. At the same time, the labor market remains strong. Good-sounding things can drive consumer prices higher. Because a strong labor market is often seen as the driving force of wages and therefore inflation. As such, it’s unclear whether Fed Chairman Powell will actually commit to pausing interest rates at upcoming meetings.

“The worst-case scenario for (the Fed) would be to signal that it’s over and then be forced to back off by the data,” said Blerina Uruci of US fund firm T. RowePrice. It seems clear that the Fed has no plans to cut interest rates, at least not for the foreseeable future.

Instead, it is likely to hold high interest rates steady for a few months and only then slowly begin to lower them. Rate cuts as early as the summer that some have speculated are likely off the table with the Fed’s latest forecasts. (SDA)

Source :Blick