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Fed Hikes Rate by 0.25% to 16-year High, Omission in Statement Signals Hike Pause

The Federal Reserve hiked its benchmark borrowing rate for the 10th consecutive time.

In a Policy Meeting on 3rd May, the Federal Reserve hiked its benchmark borrowing rate by 25 basis points to a 16-year high. The 10th consecutive rate hike was approved unanimously by the organisation, but the policymaker hints at a further hike pause. The markets expected the decision.

The rate establishes what banks charge one other for overnight lending but also affects numerous consumer debt products such as mortgages, auto loans, and credit cards. The rise raises the fed funds rate from 4.75%-5% to 5%-5.25%, the highest level since August 2007.

The current decision comes at a difficult time when rising prices, high-interest rates, and decreasing growth appear to portend an economic crisis.

While inflation remained high, the central bank stated that higher borrowing costs for households and businesses “are likely to weigh on economic activity, hiring, and inflation,” adding that the extent of these effects “remains uncertain.”

On the other hand, markets are more concerned with whether the Fed will pause here, especially with persistent concerns about economic growth and a financial crisis that has rocked Wall Street nerves. Following the Fed announcement, stocks fell slightly, and Treasury yields mainly fell.

During a news conference on Wednesday, Chairman Jerome Powell stated that “a decision on a pause was not made today” but that the change in the statement language regarding future policy firming was “meaningful.”

The post-meeting statement left out a language from the prior statement that said, “the Committee anticipates that some additional policy firming may be appropriate” for the Fed to accomplish its 2% inflation target.

Many market experts believe that a rate hike in June is more likely than what the market is currently pricing if economic data slows only gradually, inflation remains elevated, and banking sector volatility remains relatively contained.

Taken together, the moves offer, at best, a hazy indication that, while the tight policy may continue in place, the route forward for actual interest rate hikes is less evident as policymakers examine incoming data and financial conditions.

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