Fed Considers Further Rate Hike to Tackle Highest Inflation in 40 Years

Fed Considers Further Rate Hike to Tackle Highest Inflation in 40 Years

Today, the Federal Open Market Committee (FOMC) will conclude its May policy meeting, where members will assess their efforts to curb the highest inflation rate seen in 40 years. According to the CME’s FedWatch Tool, there is an 88% probability that the FOMC will announce a 25-basis-point rate hike, which would bring the federal funds rate target range to 5.0%-5.25%. This would mark the first time since the global financial crisis that the rate has exceeded 5%.

Anticipation of further rate hikes persists amidst economic reports supporting the need for action

Several recent economic reports appear to support the case for another rate hike. For example, the First Republic Bank’s deposit withdrawal stress has been resolved, and there has been an unexpected decline in initial jobless claims despite a consistently robust labor market. However, the Q1 GDP report has complicated the FOMC’s decision-making process, and the committee has been closely monitoring the Employment Cost Index and Personal Income and Outlays.

Fed Chief Economist expects flexibility in future rate hikes, signaling a possible pause in efforts to restore price stability

RSM U.S. Chief Economist Joseph Brusuelas is keeping a close eye on any changes to the FOMC’s March statement, which included the phrase “some additional policy firming.” Brusuelas believes that the committee will likely replace “some” with “any,” signaling greater flexibility in future rate hikes and potentially paving the way for a strategic pause in the central bank’s efforts to restore price stability. Even if Fed Chair Jerome Powell indicates a willingness to pause the rate hikes, he is likely to emphasize that the central bank has not yet declared victory in its fight against inflation.

Analysts predict Powell’s leadership will determine the future direction of U.S. monetary policy

Investors seem to be disregarding the Fed’s determination to combat inflation, according to Logan Kane of Seeking Alpha. John Mason has examined the extent to which Jay Powell’s leadership could impact the future direction of U.S. monetary policy. Meanwhile, Mott Capital Management and Cavenagh Research are offering contrasting views on the topic.