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1 May 2023

Econ Digest

FOMC meeting, May 2-3, 2023: Fed is likely to raise policy rate to 5.25%, and this might be the last rate hike of the cycle

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         It is expected that the US Federal Reserve (Fed) will raise its policy rate by another 0.25% to 5.00-5.25 percent at the Federal Open Market Committee (FOMC) meeting scheduled for May 2-3, 2023. This may be the final rate hike of the current upward interest rate cycle amid credit tightening due to problems in the banking sector and recent policy rate increases, which are expected to cause the US economy to slow down and potentially tip into a recession at any point in subsequent quarters. Although inflation in the US has gradually declined, it remains at an elevated level. The robust labor market will continue to support the Fed to raise its policy rate at the FOMC meeting on May 2-3, 2023 even as the US economy has exhibited signs of a slowdown after the 1Q23 GDP grew at a rate of 1.1% annualized QoQ, which was lower than the market’s expected 2.0% annualized QoQ growth.

         Meanwhile, KResearch is of the view that the anticipated policy rate hike at the upcoming FOMC meeting may be the final one of the current upward interest rate cycle, bringing the Fed funds rate to its peak of 5.00-5.25%, which aligns with the Fed dot plot released at the previous meeting. Although inflation in the US has significantly declined, it remains relatively high. Coupled with the softening US economy due to the impacts of the Fed’s aggressive rate hikes in recent years and credit tightening due to the US bank issues, KResearch anticipates that the Fed will place more weight on the economic risk and halt the rate increase after the upcoming FOMC meeting. The US central bank may maintain its status that the policy rate in the range of 5.00-5.25% should be adequate to bring inflation to its target of 2.0% and avoid a hard landing, without significantly impacting the economy. Nevertheless, the Fed’s future monetary policy will likely hinge on inflation and economic figures. As the US economy is set to soften, it is likely that the Fed will cut its policy rates during 2023.

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