increasing stacks of coins representing percentage rates with a smiling young lady in the foreground indicating it's okay

As expected, the U.S. Federal Reserve raised its key interest rates a quarter point on 3 May, setting them at 5 percent on deposits and 5.25 percent on loans, their highest levels since 2007 as the Great Recession set in.

It was the 10th rise in rates in as many Fed meetings. The rate has moved from 0.25 percent to 5.25 percent in 14 months, the fastest pace of rate increases since the early 1980s. 

Interest rates on mortgages, credit cards, car loans, and other consumer loans are all likely to increase again now.

Stock markets retrenched slightly on the news. The Dow Jones Industrial Average pulled back 0.8 percent, the NASDAQ 0.5 percent, and the Standard & Poor’s 500 index 0.7 percent.

While the idea of now pausing rate hikes came up at the meeting of the bank’s Open Market Committee, it was not pursued, Fed chair Jerome Powell said in a post-meeting press briefing.

However, he did say “we feel like we’re getting closer” to pausing “or maybe even there.”

“He couldn’t commit to a pause but he all but did,” Mark Zandi, chief economist at Moody’s Analytics, said in a comment quoted by the Financial Times.

Futures-market players then pared back their bets that the Fed would raise rates again, seeing in Powell’s comment an increasing likelihood that the bank is done with hikes for the foreseeable future. 

The banking sector’s ongoing turbulence has begun to tighten lending conditions, but the full impact is unlikely to be felt for months, The Wall Street Journal noted, which could lead the Fed to raise rates again if inflation flares back up over the summer.

Powell cited data that shows midsize banks tightening their lending standards.

Those tighter conditions “are likely to weigh on economic activity,” the committee noted in its public statement following its meeting.

“What has become clear is that the downside risks to the outlook have grown, potentially substantially,” Tiffany Wilding, Pimco’s chief U.S. economist, told the FT.

“Given that shifting balance of risk, it’s appropriate to pause” further rate increases, she added.

“For the last 12 months, [the Fed] has been all about inflation and the pace of employment growth,” Blerina Uruci, T. Rowe Price’s chief U.S. economist, told the WSJ.

“Now, perhaps, that is broadening,” she added. “Banking sector stress and credit conditions are going to be part of that calculation much more now.”

In March’s statement after the Fed committee meeting, the group said that additional boosts to interest rates “might be appropriate.” 

That language disappeared from last week’s statement and was replaced by a comment that Fed officials would monitor economic conditions and the effects of their rapid-fire rate increases.

“That’s a meaningful change, that we’re no longer saying that we ‘anticipate’ additional increases,” Powell said.

In the statement following its meeting, the committee acknowledged that inflation remains “elevated.” It said it will assess the economic impact of its chain of rate rises, as well as incoming economic data, when deciding whether additional rate bumps “may be appropriate.”

While Powell said he didn’t share the view of Fed staff forecasters that the U.S. would see a recession later this year, he refused to rule out an economic downturn.

“It’s possible that we will have—what I hope would be—a mild recession,” he acknowledged.

In past statements, the Fed has said that beating inflation will require a period of “below-trend growth and some softening in labor market conditions,” which a recession would provide.

The prospect of a recession, even a mild one, has encouraged analysts and market players to think that the Fed is done with rate increases for now.

Once again, Powell disagreed with forecasters predicting that the central bank will begin cutting interest rates this year.

“We on the committee have the view that inflation is going to come down not so quickly,” he said. “In that world, if that forecast is broadly right, it would not be appropriate to cut rates and we won’t.” 

TREND FORECAST: After the Fed met on May 3rd the word on The Street was they would begin to pause on their raising interest rate when they meet in mid-June… and then begin lowering them by year’s end. But with the stronger than expected job numbers that came in, the bet changed. And now this week the CPI and the producer price index figures will be a signal what to expect next. Thus, it is a guessing game. 

However, we do forecast the Fed will lower interest rates when the Presidential Reality Show takes center stage in an effort to keep the currently ruling political power in charge of Washington.

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