It is widely anticipated that on Wednesday, Federal Reserve officials will raise borrowing costs by a quarter of a percentage point, marking the 10th consecutive rate increase since March 2022. However, there is speculation among investors and economists that this may be the central bank’s final action before taking a pause. The US dollar has weakened ahead of the key FOMC monetary policy meeting and investors will avoid making large trades ahead of the decision.
A survey conducted by Reuters showed that most investors expect the Fed to hike rates by 25 basis points, with the remainder expecting a pause.
Bank of America: A mild recession won’t force the Fed to cut rates
Perhaps the decline in the stock market on Monday indicates that investors are starting to moderate their optimism regarding the Federal Reserve’s potential interest rate cuts later this year due to the economic slowdown.
According to a note to clients from Bank of America global economist Ethan Harris, the markets may have an overly optimistic view on how easy is to bring inflation back to the target, and they might be surprised when the Fed refrains from cutting rates. As reported by Bank of America, investors seem to expect that the Fed will change its policy and cut rates in response to a shallow recession, and they might get disappointed when this doesn’t happen.
Bank of America expects banks to remain hawkish and continue raising rates to control inflation. As they noted, a mild recession in the US and no growth in major economies would not change the banks’ response to elevated inflation.
No rate hike?
Former Fed official Eric Rosengren believes the Fed should not hike rates today. The former president of the Boston Federal Reserve said it would be a mistake if the Federal Reserve decided to increase interest rates on Wednesday. Talking on CNBC on Tuesday, Rosengren stated that given the turmoil in the banking industry and the economic slowdown, policymakers should consider ending the rate-hiking cycle that started back in March 2022.
With the economy anticipated to slow down in the second half of the year, raising rates should not be on the agenda until the Fed has a better view of the economy, Rosengren added.
What to expect from Fed officials?
According to the CME Group’s FedWatch tracker, traders in the futures market are currently indicating a 96% probability of the Federal Open Market Committee approving a quarter percentage point rate hike at the conclusion of their two-day meeting.
Fed policymakers have repeatedly said that they do not expect to lower rates any time soon and have suggested that further increases might be needed if inflation and economic strength persist.
Investors will get a better idea of what policymakers have in mind on Wednesday in their post-meeting statement. With no new economic projections at this meeting, market participants will also closely watch the news conference with Fed chair Jerome H. Powell for any clues about the Fed’s next move. If the Fed delivers a rate hike as expected and strikes a hawkish tone, then the USD will strengthen as markets will be wondering whether further rate hikes will come. If the Fed is cautious, suggesting that there may be a pause in the rate hiking cycle, then the greenback will weaken.
With the current volatility, contacting a currency specialist will allow you to safeguard your business and finances by planning ahead. If you are a business transferring funds overseas, get in touch with Universal Partners FX and their dedicated team to discuss the latest market movements ahead of your currency exchange. Universal Partners FX can provide invaluable help on efficient risk management and tailored solutions to your business’ transfer needs.