Tuesday, May 28, 2024
HomeEconomyFed Hints at a Possible Pause After a Decade-Long Rate Hike Streak

Fed Hints at a Possible Pause After a Decade-Long Rate Hike Streak

The Federal Reserve has raised its benchmark interest rate for the 10th consecutive policy meeting, marking a 0.25 percentage point increase to a range of 5% to 5.25% – the highest level since 2007. However, the Fed has also signaled that a pause in the tightening cycle may be on the horizon as concerns about the banking sector persist and economic growth prospects diminish.

While Fed Chairman Jerome Powell noted that no decision on a pause was made during the meeting, the language in the statement suggests that the Fed is closely monitoring inflation risks and considering whether additional rate hikes will be necessary. The Fed aims to achieve and maintain a level of interest rates that are “sufficiently restrictive.”

The Fed’s statement also acknowledged recent issues in the banking sector, including the failure of Silicon Valley Bank and the closure of Signature Bank in March, as well as the sale of First Republic to JPMorgan earlier this week. Nevertheless, the Fed maintains that the US banking system is “sound and resilient.”

Stocks and Treasury Yields React to the Fed’s Statement

Following the Fed’s statement, the S&P 500 rose 16 points, the Dow Jones Industrial Average dropped 35 points, and the Nasdaq climbed 67 points. Benchmark 10-year Treasury note yields increased two basis points to 3.411%, while 2-year notes gained three basis points to 3.955%. The US dollar index fell 0.4% to 101.403.

According to CME Group’s FedWatch, there’s a 71.1% chance that the Fed will hold rates at 5% to 5.25% at its next policy meeting in June, while bets on a quarter-point rate cut in September have risen to 46.2%.

Nigel Green, CEO of London-based deVeere Group, criticized the Fed’s handling of inflation and warned that the latest interest rate hike could push the US economy into a longer-term recession, which would also impact the global economy.

Economic Data and Labor Market Indicators

Recent Commerce Department data revealed that the core PCE price index, one of the Federal Reserve’s favored inflation metrics, accelerated at a 4.9% pace in the first quarter. Meanwhile, a Labor Department report showed that private-employer wages increased 5.1% in March.

However, the labor market is showing signs of strain, which may lead to decelerating wage growth and subsequently ease inflationary pressures. Data from the Labor Department revealed a significant decline in March job openings and a two-year high in layoffs.

As the Fed keeps a close eye on these economic indicators and the potential need for future rate hikes, investors and businesses will be closely monitoring the central bank’s next move.