According to recent expectations, the U.S. Federal Reserve is expected to raise the lending rate by 25 basis points (bps) to 5.25% in three days. A poll of 105 economists showed that 94 of them predict a 25bps rate hike during the May 2-3 Federal Open Market Committee (FOMC) meeting. While a rate hike in May is anticipated, economists believe it will be the last one in 2023, with the majority expecting the rate to remain at 5.25% for the rest of the year.
Market observers expect benchmark interest rate increase
Various reports and surveys suggest that market observers anticipate a 25bps increase in the benchmark interest rate at the FOMC meeting this week. The CME Group Fedwatch tool indicates that 83.9% of respondents predict a 25bps rate hike, while 16.1% foresee no rate hike for the May meeting. These predictions align with forecasts economists provided at the beginning of April 2023, and Bloomberg’s recent report also supports a 25bps rise.
A Reuters survey revealed that 90% of the 105 economists polled expect a 25bps rise in May, with 59 of them predicting that the federal funds rate will remain unchanged for the rest of 2023. Additionally, 26 participants forecast a rate cut. Most of the surveyed economists do not anticipate the U.S. inflation rate reaching the Fed’s 2% target until 2025 and acknowledge the risk of inflation rates spiking again this year.
Uncertainty surrounding additional hikes beyond May
Michael Gapen, the chief U.S. economist at Bank of America (BOFA) Securities, commented that there is still much work to be done before the 2% target is achievable. Gapen also expressed uncertainty about whether the Fed will increase the benchmark rate after May.
“On the data front, despite the slowdown in inflation in March, there is still a lot more work to be done to get back to the 2% target. We maintain the first rate cut in March 2024. Should the stresses in the financial system be reduced in short order, we cannot rule out that stronger macro data will lead the Fed to put in additional hikes beyond May.”Michael Gapen