The Federal Reserve recently announced a rate hike in March, which economists believe will be followed by another rate hike at the May 3 meeting of the Federal Open Market Committee (FOMC). Additionally, the recent move by Saudi Arabia and some members of the Organization of the Petroleum Exporting Countries (OPEC) to cut oil production may complicate the central bank’s mission. In this article, we will explore the impact of these events on the Fed’s future policy and the possibility of peak rates in the near future.
The Market Anticipates Another Rate Hike
The May 3 FOMC meeting has investors on edge as they anticipate another rate hike. According to CME Group’s Fedwatch tool, there is a 66% chance the Fed will raise the rate by 25 basis points (bps) in May. Conversely, there is a 34% chance that the Fed won’t raise the rate in May, and some believe that after a 25 bps rate hike, May will be the last increase for 2023.
OPEC’s Decision May Impact Fed’s Policy
Sarah House, senior economist at Wells Fargo, pointed out that the recent decision by Saudi Arabia and OPEC to cut oil production could impact the Fed’s future policy. House explained to CNN reporter Bryan Mena that the Fed sees OPEC decisions as mostly geopolitical, but they can impact production of goods and the transportation of other items, leading to higher oil prices that can bleed into that core component, which the Fed tends to focus on when setting policy.
Economists Predict Peak Rates in Sight
According to economists surveyed by Bloomberg Economics, the federal funds rate is expected to reach 5.25% by the end of 2023. Economist Anna Wong stated in the forecast that they expect the Fed will hike by another 25 basis points at its May meeting when the upper bound of fed funds rates reaches 5.25%. With the recent production cuts by OPEC+ and the still-tight U.S. labor market, inflation will likely remain in the vicinity of 4% in 2023, keeping the Fed from rate cuts, as markets currently foresee.
Wong further added that they see the Fed holding rates at the peak level for the duration of this year, even as a mild recession is likely to develop in late-2023. Portfolio manager Michele Morra at Moneyfarm believes that investors have shifted their focus away from inflation and are now fixated on a recession. With inflation slowing down and “even if taking into account a more dovish monetary policy, the main focus is recession.”
Peak Rates are in Sight
Bloomberg economist Tom Orlik believes that the interest rate will soon peak for various reasons. Since the start of the year, central banks have been buffeted by rival forces. Faster China reopening, Europe dodging a downturn, and tight U.S. labor markets all argue for higher rates. The collapse of Silicon Valley Bank and Credit Suisse pull in the opposite direction. So far, with limited signs of a broader banking crisis, it’s the arguments for tightening that are winning the day. Peak rates are in sight, but we’re not quite there yet.
In conclusion, with the May FOMC meeting fast approaching, investors are keeping a close eye on the Fed’s policy. The recent decision by OPEC to cut oil production and the potential for another rate hike have economists predicting peak rates in the near future. While the market remains uncertain, the focus has shifted to a possible recession, and the Fed is expected to hold rates at their peak level for the duration of this year.
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