ISTANBUL
The US Federal Reserve is expected to pause its interest rate hikes in the second half of this year, but that would come after it makes one last rate rise this Wednesday, according to an expert.
The central bank, which has been engaging in unprecedented monetary tightening over a 14-month period, is still in a fierce fight to lower record-high inflation that jumped last year to a 40-year high.
“Our forecast calls for one additional 25-basis-point hike this week and then has the Fed pausing until the end of the year,” Martin Wurm, a director at Moody’s Analytics, told Anadolu via email. “We predict that the Fed will begin cutting rates in early 2024, when inflation is closer to target.”
Wurm said Fed Chair Jerome Powell in his post-meeting press conference speech would likely signal that the central bank is considering monetary policy sufficiently restrictive at the point for inflation to return to target over time, which is 2%.
Annual consumer inflation in the US has significantly eased in recent months, coming in at 5% in March – a remarkable decline from June’s 9.1% yearly gain.
The figure, however, is still far away from the central bank’s inflation goal of 2%.
The Fed also faces other hurdles besides inflation, including and most importantly the recent turmoil in the US banking sector.
On Monday, troubled First Republic Bank was seized by US regulators, and its deposits and most of its assets were sold to JPMorgan Chase.
“Regulators have worked swiftly to resolve the failure of First Republic Bank and will do so again if other distressed banks come forward,” said Wurm.
The Federal Deposit Insurance Corporation (FDIC) released a comprehensive overview late Monday of the deposit insurance system and options for its reform to address financial stability concerns stemming from recent bank failures.
While President Joe Biden said regulators’ actions are keeping the US banking system “safe and sound,” International Monetary Fund Managing Director Kristalina Georgieva warned there could be more weaknesses and vulnerabilities in the nation’s banking industry.
“However, the turmoil has left a mark on bank lending. Credit extended especially by smaller banks tightened sharply in late March and early April, which will weigh on small and midsized businesses as well as households in the coming months,” said Wurm.
“The silver lining, however, is that tighter credit conditions also mean that the Fed will not have to tighten as much as previously anticipated,” he added.
