The banking crisis had already begun when the Federal Open Market Committee (FOMC) met for the last time on March 21-22. The FOMC meeting minutes, which were made public on April 12, show how concerned Fed staff advisers were about the looming banking crisis. It is now clearly evident that the Fed advisers at the time of the March meeting included a mild recession starting later this year, with a recovery over the subsequent two years.
Wall Street initially climbed as March CPI data indicated that US consumer prices grew less than predicted. However, the rally was short-lived as markets reverted to expectations that the Fed might hike interest rates more to combat inflation amid increased economic uncertainty.
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What also came about alarming was the fact that the officials highlighted – Historically, recessions related to financial market problems tend to be more severe and persistent than average recessions.
Still, there was a rate hike of 25bps with Fed officials raising their benchmark lending rate to a range of 4.75% to 5%. While core inflation is still a concern, the most recent US CPI figures for March also suggest a continued lowering of inflation.
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In its next FOMC meeting in May, the Fed is again expected to hike rates by 25bps followed by a pause. However, the language in the FOMC minutes, along with the remarks and the uncertainty around the potential effects of credit tightening on the economy may give the Fed some room to manoeuvre less aggressively.
Most officials have predicted that the terminal rate would reach 5.1% this year in quarterly forecasts provided along with the rate decision in March, indicating one more quarter-point increase in May and then a long pause before rates are cut.