The US Federal Reserve will meet next week to vote on interest rate hikes. The FOMC meeting is scheduled for May 2-3, with Fed Chairman Powell announcing the decision on May 3. Markets expect a 25 basis point rate hike at the May FOMC meeting. Following that, the Fed is projected to stop raising rates beginning with the June 13-14 FOMC meeting. When the Fed pivots will depend a lot on the incoming macro data on headline and core inflation, PPI, the labour market, consumer spending, and so on. As previously stated by the Fed, a rate cut may be expected beginning in 2024.
Following the 25 basis point rate hike in March, the Federal funds rate is now between 4.75% and 5%, the highest level since 2006. The Federal Reserve has already kept its estimate of the terminal rate or the point at which it’s key fed funds rate reaches a peak, at 5.1%, corresponding to a target range of 5%-5.25%.
Meanwhile, corporate earnings are at centre stage with companies reporting mixed results. As has been seen in the past, companies expecting a bad quarter typically publish results at the fag end of the earnings season. The investors should be ready for any bad surprises. Any good guidance from company management will determine the sentiments for that industry’s stocks. Banking industry results will be keenly watched by investors and analysts.
Come May, the action will most likely shift from inflation, and rate hikes to the credit crunch and its impact on the economy. The Fed still has a lot of work to do until the inverted yield curve reverses. Better clarity for the market may emerge in June and July as a lot of data would have arrived by then.
The risk of entering into a recession is the talk of the town. It remains to be seen how Fed manoeuvres to keep the economy growing in a declining inflationary environment.