The US Federal Reserve expects interest rates to rise again despite signs of an economic slowdown

The US Federal Reserve is widely expected to hike interest rates for the tenth – and possibly final – time on Wednesday as it continues its fight against high inflation.

The Federal Reserve is likely to make this decision despite mounting signs that the US economy is slowing, with many economists predicting the US will enter a mild recession later this year.

Analysts and traders expect the Fed to hike rates by 25 basis points and then hold them high to bring inflation back to its long-term 2% target without triggering a deeper, more painful recession.

“We expect the Fed to hike 25 basis points next week and signal a pause in June, with a weak upside bias for rates going forward,” Bank of America economists wrote in a note to clients on Friday.

Another rate hike on Wednesday would be the Fed’s 10th straight rate hike and would take the benchmark to between 5 percent and 5.25 percent — the highest level since 2007.

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More than 80 percent of futures traders expect the Fed to hike rates by another 25 basis points, according to CME Group data.

The May 2-3 rate-setting Federal Open Markets Committee (FOMC) meeting will be held under very different circumstances than the previous one in March, which took place amid a brief, intense banking crisis sparked by the rapid collapse of Silicon Valley Bank (SVB) a few days earlier.

SVB’s rapid demise after taking on excessive interest rate risk raised concerns about bank contagion, compounded a few days later by the collapse of New York-based Signature Bank.

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Amid ongoing turmoil in the banking sector, the Fed held off a major rate hike on March 22, opting instead for a quarter-point hike.

Joint efforts by US and European regulators following the collapse of the SVB helped calm financial markets and appear to have prevented further high-profile casualties in the banking sector.

“As credit market stress eases, Fed officials are likely to push for a 25 basis point rate hike at the early May meeting,” senior US economist at Oxford Economics Michael Pearce wrote in a recent note to clients.

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But despite calmer financial markets, the collapse of the SVB still has a lasting impact on the banking sector, as banks tightened lending conditions in the weeks that followed.

Fed officials have noted that the tighter credit conditions could act like an additional rate hike, potentially reducing the number of hikes needed to bring inflation back to 2%.

Fed Governor Christopher Waller said in mid-April that “a significant tightening in credit conditions could avoid the need for further monetary tightening.”

But he warned against “making such a judgment” before good data is released on the impact of the financial turmoil and bank lending.

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US regulators admitted Friday they could have done more to prevent the collapse of both SVB and Signature Bank; The Fed also called for stricter banking rules going forward.

Recent US economic data is pointing to a slowdown in the economy, with growing forecasts that the US will enter a recession later this year.

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Data released in late April showed economic output slowed to an annualized rate of 1.1 percent in the first quarter of this year, while the Fed’s preferred rate of inflation fell to an annualized rate of 4.2 percent in March, down from 5.1 percent the month before .

The increasing impact of the Fed’s rate-hiking campaign on the economy has analysts and traders predicting that the Fed is likely to stop raising rates following Wednesday’s decision.

With the quarter-point rise widely expected, next week’s focus will instead be “on any changes to the guidance language in the Fed’s statement,” economists at Deutsche Bank wrote in a recent note to clients.

“While our base case remains that May’s rate hike will be the last of this cycle as the economy reacts to the tightening so far, we see risks pointing to another hike in June,” the statement said.

Fed Chair Jerome Powell suggested after March’s rate decision that the Fed could raise rates one more time before ending its current cycle of rate hikes.

His comments supported FOMC officials’ mean forecast for interest rates for 2023.

Minutes from the March FOMC meeting show that the Fed predicted the US would enter a mild recession later this year when it decided to hike interest rates.

The depth of the recession could depend on how far the Fed decides to hike rates further, KPMG economist Kenneth Kim wrote in a recent note to clients.

“Any further rate hike beyond May risks a deeper recession than the mild downturn we currently foresee,” he said.