The U.S. Federal Reserve is anticipated to raise the lending rate by 25 basis points (bps) to 5.25% in the upcoming May 2-3 Federal Open Market Committee (FOMC) meeting, according to a recent poll of 105 economists. The majority of those polled expect this to be the last rate hike for 2023, with the rate maintained at 5.25% for the remainder of the year.
Tightening cycle enters next phase: holding benchmark rate steady
Market observers foresee a 25bps increase in the benchmark interest rate at this week’s FOMC meeting, with 83.9% of predictions supporting the hike, as indicated by the CME Group Fedwatch tool. Conversely, 16.1% of the predictions foresee no rate hike during the May meeting. These forecasts align with the predictions made by economists at the beginning of April 2023.
Bloomberg’s report supports the expectation of a 25bps increase, suggesting that despite the ongoing banking system turmoil, the FOMC will raise rates to 5.25% and signal a pause in rate hikes. The next phase of the tightening cycle will focus on maintaining rates at the current level while monitoring inflation trends.
Economists’ opinions on May rate hike and future uncertainty
A Reuters survey reveals that 90% of the 105 economists polled expect a 25bps hike in May, with 59 predicting the federal funds rate will remain unchanged for the rest of the year. Meanwhile, 26 participants forecast a rate cut. Most surveyed economists do not expect the U.S. inflation rate to reach the Fed’s 2% target until 2025, with a continued risk of inflation spikes this year.
Michael Gapen, the chief U.S. economist at Bank of America (BOFA) Securities, noted that considerable work remains to achieve the 2% target. He added that it is uncertain if the Fed will implement further rate hikes after May. Gapen explained that stronger macro data might lead to additional rate hikes beyond May if financial system stresses are alleviated.