Will the Federal Reserve still raise interest rates? Inflation | Interest Rate hikes | Federal Reserve

The Federal Reserve will hold a monetary policy meeting from the 13th to the 14th. Against the backdrop of the Federal Reserve's continued interest rate hikes, high inflation, and banking industry turbulence, the direction of the Federal Reserve's monetary policy has attracted attention.

The interest rate hike action is not yet over

To curb inflation, the Federal Reserve has been raising interest rates for 14 months, with a total of 10 rate hikes and a cumulative increase of 500 basis points. Last month, the Federal Reserve announced at its monetary policy meeting that it would once again raise the target range of the federal funds rate by 25 basis points to between 5% and 5.25%, the highest level since September 2007.

As the Federal Reserve holds its monetary policy meeting this month, most economists expect that the Fed's interest rate hike action is not yet over.

A survey conducted jointly by the Financial Times and the Booth School of Business at the University of Chicago earlier this month showed that most economists expect the Federal Reserve to take stricter action than market expectations to eradicate inflation - at least two more 25 basis point rate hikes this year.

Among the 42 economists interviewed, 67% predicted that the target range for the federal funds rate would peak this year, reaching 5.5% to 6%. In the previous survey conducted in March, 49% of respondents held this view.

At specific time points, more than half of the respondents expect the federal funds rate target range to peak in the third quarter of this year or earlier, while another third of the respondents expect the peak to occur in the fourth quarter of this year. In addition, most economists expect that the Federal Reserve may not cut interest rates until the second quarter of next year at the earliest.

"This road will be longer and more tortuous than they imagine," said American economist Dean Crowsell. To eradicate inflation, the Federal Reserve needs to take more measures.

May be suspended once this month

Earlier this month, Reuters also surveyed the attitudes of 86 economists, with over one-third of respondents expecting the Federal Reserve to raise interest rates at least once again this year. However, only 8 of them expect the Federal Reserve to raise interest rates this month, while another 24 expect the Fed to pause rate hikes this month and start raising rates again from July.

Among these 86 economists, over 90% expect the Federal Reserve to maintain its target range for the federal funds rate between 5% and 5.25% this month. It is worth noting that if implemented, this will be the first time in 14 months that the Federal Reserve has suspended its pace of interest rate hikes.

The public opinion believes that the Federal Reserve is expected to remain silent, mainly to further evaluate the impact of this round of interest rate hikes.

On the one hand, considering the long-term and lagging nature of monetary policy, although the effectiveness of the Federal Reserve's interest rate hikes to curb inflation has begun to show, it has not yet reached the 2% inflation target.

The US Department of Labor released data in May, showing that the US Consumer Price Index rose 0.4% month on month in April, in line with market expectations, but significantly higher than the 0.1% month on month increase in March.

Meanwhile, the year-on-year increase in US CPI in April was 4.9%. After excluding volatile food and energy prices, the year-on-year increase in core CPI in April was 5.5%.

At the Federal Reserve's meeting this month, the US Department of Labor is scheduled to release May's CPI data on the 13th. However, public opinion believes that most Federal Reserve officials have already made rough decisions before this, and the May CPI index is expected to still indicate price pressures.

MIT professor Jonathan Parker said that by stopping the pace of interest rate hikes, the Federal Reserve can better interpret whether the current rate hikes are sufficient and consider whether further rate hikes are needed.

On the other hand, the negative impact of the Federal Reserve's aggressive interest rate hikes is also evident, including pushing up the costs of mortgage loans, car loans, credit cards, and commercial loans, leading to a cooling of the real estate, car, and consumer markets.

Especially in March, the successive closures of multiple US banks highlighted the negative impact of the Federal Reserve's aggressive interest rate hikes. Chicago Federal Reserve Bank President Austin Goolsby said last month that the pressure facing the banking industry needs to be taken into account.

However, a survey conducted by the Financial Times shows that respondents are more concerned about inflation than about the turbulence in the banking industry. One third of the respondents expect that by the end of 2024, the core CPI may exceed 3%.

Jason Freeman, who previously served as an economic advisor in the Obama administration, stated that there has been little progress in curbing core CPI. He even believes that the Federal Reserve needs to raise the target range of the federal funds rate to over 6%.

In addition, recent US unemployment data shows that the labor market is cooling, intensifying expectations that the Federal Reserve will suspend interest rate hikes this month. "The weekly employment data in the United States shows that the unemployment rate is rising, which gives the Federal Reserve more reason to consider suspending interest rate hikes during next week's meeting," said market analyst Matt Bridgman.

There are internal disagreements, and the market is watching

Public opinion has noticed that the current economic situation has also intensified the two factions within the Federal Reserve. According to media reports such as the Associated Press, "doves" including Powell hope to suspend interest rate hikes and decide whether to further raise them over time. They noticed that there is a lag in monetary policy, and excessive interest rate hikes may lead to economic recession.

"Given that we have come so far, we are now able to take a look at the data and constantly changing prospects, and make a cautious assessment," Powell said last month.

US President Biden's recently nominated Vice Chairman of the Federal Reserve, Philip Jefferson, also expressed similar views. He also stated that the Federal Reserve's expected maintenance of the federal funds rate target range this month should not be interpreted as a "peak".

The hawks believe that the current inflation level, especially the core inflation level, is still too high and hope that the Federal Reserve will raise interest rates at least once or twice from this month.

The Governor of the Cleveland Federal Reserve Bank, Lolita Mester, said in an interview last month that she did not see convincing reasons to support a pause in interest rate hikes. "This means waiting for more evidence before deciding what action to take."

In addition, surveys by the Financial Times and Reuters show that the number of industry insiders who believe the US economy will experience a recession this year has decreased.

At present, the "dove faction" has a slight advantage, and the Federal Reserve's expected suspension of interest rate hikes this month is also seen as a compromise. However, the Associated Press stated that there will not be much important economic data released between the Federal Reserve's monetary policy meetings in June and July, except for a job report and an inflation report. When the Federal Reserve meets in July, inflation may still remain high and employment remains strong, with hawks likely to have the upper hand.

As the Federal Reserve is about to hold its monetary policy meeting, the S&P 500 index slightly rose on the 9th, with light trading and investors mostly watching.