SUMMARY
- The Federal Reserve is expected to maintain the current interest rates, as predicted by Tuesday morning's futures indicating a 94% chance.
- Despite ten rate increases over 15 months, inflation continues to surpass the 2% target, reaching a four-decade peak last year.
- A robust job market and resilient inflation hint at ongoing cost hikes for consumers, while the Fed's cautious approach may prevent a recession but slow economic growth.
This Wednesday, the world will eagerly await the Federal Reserve's decision on whether it will pursue another rate hike, or pause its campaign against inflation. The prevailing prediction among market pundits is that the Federal Reserve will refrain from increasing interest rates this time, as evidenced by the Tuesday morning futures indicating a 94% chance of maintaining the status quo.
Over the past 15 months, the central bank has taken an aggressive stance by hiking interest rates ten times. Yet, inflation continues to hover above the desired 2% threshold, hitting a forty-year peak last year. The Federal Open Market Committee's move in May to elevate the benchmark rate by 0.25 percentage points led to the federal funds rate climbing to between 5%-5.25%, a level unseen since 2007.
Even if the Federal Reserve decides against a rate boost this Wednesday, future hikes may be on the table. As per futures traders' predictions on Tuesday morning, there is a 61% likelihood of another rate increase in July. The economic community remains divided over the slowing economy and whether excessive rate increases could trigger a sharp turnaround if the banking crisis escalates.
Despite a stronger than predicted job market and robust inflation, consumers might have to endure rising costs. A more prudent approach from the Federal Reserve might ward off a recession, but it could also lead to a more gradual economic slowdown. In May, the U.S. labor market saw an addition of 339,000 nonfarm payrolls, significantly higher than the projected 180,000. The national unemployment rate reached 3.7% in May, a slight uptick from the anticipated 3.5%.
According to the Bureau of Labor Statistics, the Consumer Price Index (CPI) for May 2023 showed a 4% increase year-over-year, less than the forecasted 4.1%, and well below April's 4.9% increase. This is the lowest annual rate since March 2021, suggesting a potential downward trend.
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