WASHINGTON: The US Federal Reserve on Tuesday opened a two-day meeting to decide whether to raise its benchmark lending rate for a 10th — and possibly final — time to tackle rising prices.
The Fed has been on an aggressive campaign of interest-rate increases since March last year, rapidly raising rates to help target inflation, which remains stubbornly high at 5%, well above its long-term target of 2%.
With the Federal Open Market Committee (FOMC) widely expected to raise its base rate by another quarter-point on Wednesday, analysts will be looking for any “revisions to the forward guidance in its statement” Goldman Sachs’ chief US economist David Mericle wrote in a recent note to clients.
“We expect the committee to signal that it anticipates pausing in June but retains a hawkish bias, stopping earlier than it initially envisioned because bank stress is likely to cause a tightening of credit,” he said.
Futures traders also see a more than 95% chance that the Fed will raise its benchmark rate by 25 basis points on Wednesday, according to CME Group.
Such a move would bring the interest rate to between 5% and 5.25% — its highest level since before the global financial crisis.
Uncertainty remains
Like the Fed’s previous rate decision, this week’s FOMC meeting takes place shortly after one of the largest bank failures in American history.
First Republic’s failure on Monday tops the dramatic collapse of Silicon Valley Bank (SVB) dramatic collapse on the unenviable list of the largest commercial banking failures in US history.
In March, the Fed held off a larger rate hike, instead opting for a quarter-point rise amid a banking crisis unleashed by SVB’s collapse.
First Republic’s failure has not sent the same shockwaves throughout the financial markets — despite some volatility in regional banking stocks — and most analysts still expect the Fed to plow ahead with another quarter-point hike on Wednesday.
JPMorgan agreed to buy First Republic from federal regulators in a deal announced in the early hours of Monday morning.
“I think this is going to stabilise the system, which is a good thing,” JPMorgan chief executive Jamie Dimon said shortly after the deal was announced.
The likelihood of the Fed giving firm guidance on a future pause is far from a done deal, according to some analysts.
“With inflation remaining stubbornly elevated, we expect the committee to maintain a tightening bias and repeat the language from March,” Deutsche Bank economists wrote in a recent note to clients.
