The US Federal Reserve has raised interest rates by 0.25%, with indications that a likely pause in June may be in store. The Federal Open Market Committee (FOMC) raised the benchmark rate to 5% to 5.25% from 4.75% to 5% previously. The FOMC has shifted to a more data-dependent stance, stressing that incoming information would reign supreme on monetary policy decisions.
The FOMC has stated that it will closely monitor incoming information and assess its implications for monetary policy, moving away from the language used in March calling for "some additional policy firming." This suggests that a pause on hikes may be in play for June.
The latest rate hike not only lifted the Fed’s benchmark rate to the peak level predicted in March but also to the highest level in 16 years as the Fed aims to combat elevated inflation. The move comes amid concerns about the threat a strong labor market poses to inflation, particularly core services ex-housing inflation, which makes up the bulk of price pressures.
While inflation has shown signs of cooling, the most recent reading on core PCE, the Fed's preferred inflation measure that excludes volatile components of food and energy, slowed to 4.6% in March. However, this is still well above the Fed’s 2% target.
Many on Wall Street are looking out for further pressures in the banking sector that could trigger a sharp decline in lending activity and weigh on economic growth and inflation, following the collapse of several regional banks. Goldman Sachs warns that tighter credit conditions are likely to slow growth in 2023 by about 0.4%, equivalent to the usual impact of 40bps of rate hikes.
Traders are expected to shift attention to Fed Chair Powell's press conference for further clues on the Fed's path of interest rates and any insight into the health of the banking sector. Deutsche Bank has stated that they expect to hear a preview of the latest Senior Loan Officer survey data from the press conference.
