Fed Interest Rates: New Hike Or Pause?

June 02, 2023 12:39

Interest rates have risen considerably in some of the world’s most powerful economies in the last few months. Some central banks have raised borrowing costs as they try to combat high inflation figures that have taken a toll on consumers’ budgets. The US Federal Reserve (Fed) bank has led the way with its tightening monetary policy and consecutive interest rate hikes.

As US consumers try to cope with rising costs of living, businesses also face problems with elevated interest rates that make loans more expensive. The big question is whether the Fed could pause monetary policy tightening or more interest rate hikes are on the way.

With only a few days away from the next Federal Open Market Committee (FOMC) meeting on June 14th, our blog will share some valuable insights regarding interest rates and monetary policy implemented by the Fed.

All eyes are on Fed

It is no secret that most central banks review the Federal Reserve's actions and sometimes adjust their policies taking into consideration relevant data. The Fed is considered one of the most important central banks in the world. As the US dollar is the most widely used currency in international transactions, as you read these lines, the Fed’s decisions affect its value against other major currencies.

The US central bank has raised rates 10 consecutive times since March 2022 in an effort to combat the highest inflation figures recorded in 40 years. The Fed’s chairman, Jerome Powell, that replaced Janet Yellen in 2018, probably didn’t expect such strong inflationary pressures right after the coronavirus pandemic disturbed economic activity worldwide.

In March 2022, the Fed’s governing board decided to start tightening the monetary policy as the first signs of rising inflation were becoming obvious. In just 3 months, headline inflation reached 9.1%, on an annualised basis, which was a four-decade high.

What do Fed officials say and what are the forecasts?

Of course, investors and traders can’t predict which could be the Fed’s future course of action. The Fed’s board makes decisions based on inflation figures, labour market statistics, productivity, unemployment rate and other such factors.

A few days ago, Jerome Powell noted that it is still unclear if U.S. interest rates would need to be raised more.

Speaking at a Fed research conference he mentioned that “we face uncertainty about the lagged effects of our tightening so far, and about the extent of credit tightening from recent banking stresses. So today, our guidance is limited to identifying the factors we'll be monitoring as we assess the extent to which additional policy firming may be appropriate to return inflation to 2%. The risks of doing too much or doing too little are becoming more balanced and our policy adjusted to reflect that.”

Fed’s “hawks” want more rate hikes

Cleveland Federal Reserve Bank President, Loretta Mester, spoke to Financial Times reporters regarding interest rates and said that there is no compelling reason to wait for a new rate rise.

“I don’t really see a compelling reason to pause — meaning wait until you get more evidence to decide what to do. I would see more of a compelling case for bringing [rates] up and then holding for a while until you get less uncertain about where the economy is going. The only reason for skipping a rate increase when it is clear more tightening is necessary would be extreme market volatility or some other shock. I just think that we may have to go further. At this point, I don’t really necessarily see a compelling reason that we wouldn’t want to take another small step to counter some of that really embedded, stubborn inflationary pressure,” she told FT reporters.

Some Fed policymakers are cautious regarding rate hikes

On the contrary, Federal Reserve Governor Philip Jefferson, nominated by President Joe Biden to be the Fed’s vice chair doesn’t seem to share Loretta Mester’s opinion. Jefferson suggested that a pause in rate hikes would offer the needed space and time to analyse more data before making a decision about the extent of additional tightening, adding that pausing does not imply that tightening would be over.

“A decision to hold our policy rate constant at a coming meeting should not be interpreted to mean that we have reached the peak rate for this cycle. Indeed, skipping a rate hike at a coming meeting would allow the Committee to see more data before making decisions about the extent of additional policy firming,” he noted.

Moody’s: Tighter monetary policy is on the table

The Federal Reserve may have to maintain high interest rates for a longer period of time than expected in order to reduce persistent inflation, according to experts.

Moody's analysts cautioned that the rate cycle poses dangers to the financial system, as seen by the recent volatility in the US banking sector. They noted that a robust US labour market may postpone a recession, but that there was a danger that this could lead to rising inflation and force the Federal Reserve to hike interest rates even more.

“Cooling economic activity and weaker labour market are necessary conditions for inflationary pressures in the economy to ease. Too much resilience for too long would require even tighter monetary policy,” the report said.

Trading and Fed interest rate hikes

Rising interest rates have forced some businesses to alter their plans and simple people to cut back their expenses. As central banks such as the Fed, BoE and ECB raise interest rates and re-evaluate their quantitative easing policies, major currencies' values fluctuate, sometimes strengthening and others weakening.

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This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand the risks.

Miltos Skemperis
Miltos Skemperis Financial Content Writer

Miltos Skemperis’ background is in journalism and business management. He has worked as a reporter on various TV news channels and newspapers. Miltos has been working as a financial content writer for the last seven years.