The Federal Reserve may hike interest rates by another quarter of 1 percentage point on Wednesday. This will be its tenth interest rate hike. As economists said, this can be the last rate hike of this cycle. The 25 basis point move shall push the Federal Reserve’s interest rate to 5 percent to 5.25 percent. Many see this as high enough to slow the economy and cool inflation.
There are many reasons to pause, as economists said. The way to least resistance for the Federal Reserve is to confirm the huge market expectations of a move. Businessmen and traders in markets put the odds of a quarter-point rate hike. This is at above 80 percent.
Banks may pull back lending to restore their balance sheets, as economists analyzed. Further, economists think that this may cool the economic crisis.
The weekend fall of First Republic Bank, the 2nd-largest bank failure, could not stop the Fed’s aim of proceeding with a rate hike on Wednesday. The First Republic Bank was the 3rd major bank to fail in the past 2 months. Regulators took it over on Sunday night, and the bank was sold to JPMorgan Chase.
Another quarter-point of the rate increase on Wednesday shall bring the Federal Reserve’s key rate at 5.1 percent, a sixteen-year high and a full five percentage points higher than it was in March 2022.
The Federal Reserve’s rapidly tightening credit to combat inflation. It reached its highest level in 4 decades the last summer and has been slowed since then. The rate increases indicate slow borrowing and also slow spending to cool the economy.
But in the process, the Federal Reserve’s rate hikes had led to higher prices for mortgages and auto purchases, credit cards, and corporate borrowing and thus have now increased the risk of a recession.
The economy appears to be cooling, with consumer spending in February and March. This indicates that several shoppers are now very cautious of the high prices and borrowing costs.
Along with the uncertainties the Federal Reserve faces is the effect of the big bank failures of the past 2 months.
Majorly, policymakers should decide where they think inflation is heading.
The consumer price index increased 5 percent in March from one year earlier. This is sharply lower than the 9.1 percent peak in June.
Again, the growth in rental costs started declining. This is as more newly built apartments came online. Energy and Gas prices fell steadily. Food costs, however, are now moderate. The supply chains are now not blocking trade and also, therefore, lowering the price of furniture, cars, and appliances.
Federal Reserves said they should look less at backward-looking data like the unemployment rate.
The data released on Friday show that inflation and wage growth remained high in March. This excludes the volatile energy and food categories. The core costs in the Federal Reserve’s inflation index rose to 4.6 percent from one year earlier. This was better than the 4.7 percent that it reached in July.
About the Federal Reserve
The Fed, or the Federal Reserve, is the major central banking system of the USA. The bank was created in 1913. This central bank was created to control the monetary system centrally and to solve financial and several economic crises.