may day? With US economic growth faltering and banking turmoil, one might think so. But the Federal Reserve will ignore these false alarms and hike interest rates again next week as inflation remains stubborn on a resilient labor market.
That shouldn’t come as a surprise, however, as interest rate futures markets have consistently priced in another 25 basis points (a quarter of a percentage point) increase in the central bank’s federal midpoint target, currently in the 4.75%-5% range, at the Federal Open Market Committee meeting to be held on Sept Wednesday ends. That would bring it in line with the 5.1% year-end average forecast set at the last FOMC meeting, which ended on March 22, suggesting that the Fed’s rate policy for the remainder of 2023 is likely to increase Autopilot should run.
However, the markets have a different opinion and already see the Fed changing course in the autumn. March FOMC meeting minutes show that central bank officials are forecasting the start of a recession later this year. This will likely be the main theme addressed in Wednesday afternoon’s FOMC policy statement and Fed Chair Jerome Powell’s press conference afterwards, more than the rate hike to an expected 5% to 5.25% (which carries an 84% probability on Friday). had 4%). , according to the CME FedWatch website).
The apparent slowdown in the economy and the problems facing the banks could indicate that the monetary authorities would consider forgoing further rate hikes after last year’s 475 basis points. But inflation, while below its four-decade peak last year, is still more than double the Fed’s 2% target, and its progress towards that target has stalled.
As measured by gross domestic product, real growth slowed from 2.6% in the fourth quarter of 2022 to a seasonally adjusted annual rate of 1.1% in the first quarter. However, that disguised an underlying improvement. Most of the slowdown reflected a fall in inventories. Strong consumer spending shed these excess inventories, leading to a 3.4% annualized increase in real final sales in the first quarter, up sharply from 1.1% in the previous three months.
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The FOMC continued raising interest rates in March after the collapse of the Silicon Valley bank, on which the central bank did a partial mea culpa on Friday. First Republic Bank (ticker: FRC), whose shares are down 75% over the past week and which is in receivership with the Federal Deposit Insurance Corp. could be driven continued to cause banking concerns in the headlines in recent days.
However, the struggles of some regional banks should not deter the Fed from its primary task of restoring price stability to the economy. The goal of monetary tightening is to limit lending to the private sector, said Vincent Reinhart, chief economist and macro strategist at Mellon and a former FOMC secretary and economist. Such disruptions are to be expected. The surprise is that financial conditions have not tightened further, he added in an interview.
Indeed, according to Douglas Peta, chief US investment strategist at BCA Research, much of the dislocation among banks has centered on First Republic. There is still no evidence that banks are less willing to lend due to the collapse of Silicon Valley and Signature banks, he added.
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The banking news was overshadowed by Friday’s reported stronger-than-expected increase in the employment cost index, the Fed’s preferred measure of compensation spending. The ECI increased at an annual rate of 4.8% in the first three months of 2022. Powell has hinted that something closer to 3.5% wage growth would be in line with the Fed’s 2% inflation target, JP Morgan chief economist Michael Feroli wrote on Friday.
One important piece of information the FOMC will have when it sits at the conference table will be the preliminary results of its opinion poll of senior loan officers, both Reinhart and Peta noted. This should provide the latest insight into the impact of the banking turmoil ahead of the release of the survey, which is expected next week.
The FOMC faces an economy that continues to grow despite local banking woes, but inflation is well above the Fed’s stated 2% target. Nonetheless, the market still expects rate cuts later this year, despite the Fed’s forecast to remain unchanged after the next expected rate hike. How Powell reconciles this contradiction will be a key question to be answered over the coming week.
write to Randall W. Forsyth at [email protected]
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