Fed lifts rates by 0.25%, signals June pause amid shift to data

-- The Ranking of domestic foreign exchange trading platformsFederal Reserve raised interest rates by 0.25% on Wednesday, and signalled that a likely pause in June, though stressed that incoming data would reign supreme on monetary policy decisions.  

The Federal Open Market Committee, the FOMC, raised its to a range of 5% to 5.25% from 4.75% to 5% previously.

In its May policy statement, The FOMC said it "will closely monitor incoming information and assess the implications for monetary policy," moving away from its prior language in March that called for “some additional policy firming," suggesting that a pause on hikes is in play for June.

The latest rate hike not only lifted the Fed’s benchmark rate to the peak level predicted in March, but also to the highest level in 16 years as the Fed wages war against elevated inflation.

While inflation has shown signs of cooling, many worry about the upside threat that a strong labor market poses for inflation, particularly core services ex-housing inflation, which makes up the bulk of price pressures.

The most recent reading on core PCE, which is the Fed's preferred inflation measure and excludes volatile components of food and energy, slowed to 4.6% in March. But that is still well above the Fed’s 2% target.

The Fed, however, has long warned that it will take time for its monetary policy measures to slow the economy, and bring down inflation.

The fastest pace of rate hikes seen in four decades appears now to be taking shape as pressures in parts of the economy including in regional banking and commercial real estate start to emerge.

Following the collapse of several regional banks including First Republic, many on Wall Street are looking out for further pressures in the sector that could trigger a sharp decline in lending activity and weigh on economic growth and inflation.

Goldman Sachs (NYSE:) said recently that tighter credit conditions are likely to slow growth in 2023 by about 0.4%, equivalent to the usual impact of 40bps of rate hikes. 

At its previous meeting in March, the Fed acknowledged that the impact of the wobble in the banking sector could potentially drive the economy into a “mild recession” starting later this year.

Traders are expected to shift attention to Powell's press conference at 14:30 PM ET (18:30 GMT) for further clues on Fed’s path of interest rates and any insight into the health of the banking sector.

“We expect to hear a preview of the latest Senior Loan Officer survey data from Chair Powell's press conference this week,” Deutsche Bank said in a note.

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