Its chairman, Jerome Powell, has repeated for several months that bringing inflation back to the 2% target will be a long and difficult effort, but also necessary because, otherwise, in the long term there would be equally dire consequences.
In this context, it is considered unlikely that the Federal Reserve Monetary Committee (FOMC) will pause in raising rates.
A modest increase of a quarter of a percentage point, or 25 basis points, is the most widely held assumption among market players, according to CME Group ratings.
If the idea of a pause prevailed at the end of March, they began to consider a slight increase at the beginning of April.
The US economy has held up but is now showing long-term and finally visible signs of a slowdown.
Last week, first quarter growth was 0.3% over the last three months of 2022 and just 1.1% annually. And the probability of a recession, which is more serious than initially anticipated, is widely anticipated by the markets.
Ryan Sweet, chief economist at Oxford Economics, told AFP: “Monetary tightening and recent tensions in the banking system will lead to a moderate recession, although stronger than we anticipated.”
On the other hand, the fragility of some banks back to the front with the bankruptcy of the regional bank First Republic, finally bought on Monday by the giant JPMorgan Chase, number one in the sector.
“Fear is back”
Concerns about the soundness of these mid-sized banks remain strong, and several of them saw their shares fall on Wall Street on Tuesday, including PacWest Bancorp (-27.78%) and Western Alliance (-15.12%).
“Fear is back in the banking sector,” said Adam Sarhan of 50 Park Investments. “Fear is a very powerful feeling on Wall Street. When he walks in the door, logic goes out the window,” he added.
“The Fed should see” the difficulties of these banks “as a “game changer,” said Karl Haeling of LBBW, rather than seeing the banks as “isolated cases of mismanagement.”
These regional banks suffer mainly from the increase in the rate that sets the price of the money that the entities lend to each other. In just over a year it went from a range between 0 and 0.25% to values between 4.75 and 5% today.
The Fed will announce its decision in a statement at 1800 GMT followed by Powell holding a press conference.
Tighter credit conditions could “slow down activity and jobs,” Patrick Harker, president of the Fed’s Philadelphia branch, said on April 20.
These conditions could have the same effect as rate increases by slowing demand and therefore higher prices, Powell stressed.
After the expected new hike, economists will focus primarily on the language of the statement and “whether the reference to ‘firmer’ changes,” said Art Hogan of B. Riley Wealth Management.
Many in the market expect the Fed to declare a pause or at least release a less serious statement on the currency front.
However, although inflation fell in March, core inflation (which excludes food and energy prices) barely slowed and is now higher than headline inflation.
