The Federal Open Market Committee’s (FOMC) meeting is currently underway and the final decision on policy rates will be announced on May 3. The FOMC meeting is a two-day event taking place on May 2-3. On May 3 at 2:00 PM ET, the US Federal Reserve will announce its decision on interest rates.

The US Federal Reserve is projected to raise interest rates by 25 basis points, taking the funds range to 5% – 5.25%, the highest level since 2007. If the quarter-point rate hike takes effect on Wednesday, May 3, it will be the US Fed’s tenth straight rate boost.

“There are concerns about whether the Fed will balance recession and high, uncontrolled inflation with its actions. If we do not see any surprises from Fed and the interest rate is increased by 25 basis points, the traditional financial markets likely will not react much as the hike is already in the price,” says Ruslan Lienkha, Chief of Markets at YouHodler

However, the markets may have already factored a 25 basis point hike in May. “We expect that the Fed will increase the interest rate by 25 basis points during this week’s meeting. That’s right in line with the forecast of the end of the interest rate increase cycle. According to the CME group, there is a high probability Fed will start to cut the rate by the end of 2023. This is a base scenario that is seen in the yield curve inversion of treasury bonds. If so, the market has already priced it, and it is very likely the Fed will manage a soft landing, and financial markets will continue to grow. In case of some deviation in the plan, the risk of a recession or a longer period of high inflation will be increased, which can lead to the market drop,” adds Lienkha.

Also Read: US Fed list out reasons for the collapse of Silicon Valley Bank

Investors, meanwhile, want to hear Powell’s commentary to look for any dovish beats. Markets expect Powell to say that the central bank would take a break to analyse the impact of recent rate hikes. The forthcoming Fed meeting is crucial because markets could become volatile if policymakers raise interest rates by 25 basis points as expected but do not signal a pause.

Sunil Damania, CIO, MarketsMojo says, “The market is more interested in the Fed’s future actions, and a hint of a pause in rate hikes would delight investors. On the other hand, another rate hike signal could dampen market sentiments.”

Inflation is still running high but rate hikes are making lending more stricter leading to banking concerns. Even though the Fed may keep the door open for additional raises, they are not oblivious to the fact that it may lead to a hard landing of the economy.

Also Read – US Fed Report on SVB: Bank run on deposits appears to be fueled by social media

Having managed price rises to some extent, the ongoing banking crisis is now posing a threat to US Fed and the economy. “Recently, after SVB and Signature Bank, another bank, First Republic, encountered some difficulties, and JP Morgan has now acquired it. However, there is no guarantee that other banks won’t face similar problems in the coming weeks. Smaller banks are struggling to retain deposits as customers prefer to keep their money with larger banks. Additionally, run-on deposits and mark-to-market on old bonds carrying low-interest rates are creating problems for smaller banks in the US,” says Damania.

“Furthermore, the situation in commercial real estate is quite fragile, and any issues in this sector could trigger another crisis in the US. Therefore, the banking crisis in the US would be a crucial factor influencing market sentiments,” adds Damania.

Following a rate hike of 25 basis points on May 3, ( if it happens) it remains to be seen whether the US Fed will refrain from raising rates at the next FOMC meeting on June 13-14. The US CPI comes on May 10 along with a host of other macro numbers related to the jobs market etc. till the FOMC’s next meeting in June. Meanwhile, markets will be waiting for remarks from Fed Chairman Powell and other Fed officials on potential rate hikes as they speak from different forums after the Blackout period.

All eyes will be on Powell’s commentary following the release of monetary policy news on May 3. The banking crisis in the US is far from over even after JP Morgan took over First Republic Bank. Elsewhere, US President Biden will invite Congressional leaders to the White House to discuss this after US Treasury Secretary Yellen warned Congress that the US might run out of money on June 1.