The Federal Open Market Committee (FOMC) meeting next week is critical for the markets. The US Federal Reserve meets on May 2-3, at a time when inflation is falling and the interest rate cycle is peaking. Although expectations for a 25 basis point increase are high, voices urging a pause can also be heard. “I think the Fed should take a pause at this point and just see what happens over the next few months. I think we are starting to see higher interest rates hit the consumer, and unfortunately, that was their goal and it’s worked out. I think this is a blip and we’ll unfortunately see inflation rise a little bit higher on the next CPI report primarily due to the cost of oil,” says Faron Daugs, Certified Financial Planner, Founder & CEO of Harrison Wallace Financial Group.
The Federal funds rate had increased by 25 basis points since March, bringing it to a range between 4.75% and 5%, which is the highest level since 2006. A 25 basis point hike in May will take the federal funds rate range to 5% – 5.25%. The economic impact of rate increases is causing a credit crunch scenario. The inverted yield curve is already signalling a recession ahead.
Kavan Choksi, a successful investor, business management, and wealth consultant at KC Consulting, says it’s only a matter of time before the Fed has to choose between the economy and continuing inflation. “Recession may hit the second half of this year, but the Fed is pretty much at the end of the road and will be done within the next month or two. The way it looks right now, it still seems like we have a strong and resilient economy right now, but we’re expecting that to change within the second half of this year. We’re still quite a way off from the Fed’s 2% target,” says Choksi.
Many analysts believe that the 25bp increase in May will be the last. Following that, a six-month respite may be followed by a 50bp rate reduction in November and December, with Fed funds reaching 3% by the second quarter of 2024.
Cracks are beginning to appear following the most virulent tightening cycle of monetary policy in the previous 40 years. Lending standards will become stricter as a result of the weakening property market, declining corporate sentiment, and recent banking pressures. The likelihood of an economic hard landing is increasing, which will cause inflation to decline more swiftly. Due to its dual goal of ensuring price stability and maximum employment, the Fed is free to act quickly by lowering interest rates.