Federal Reserve May Hike Rates Once More Before Year End, Economists Predict

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Economists are expecting that the Federal Reserve may raise interest rates by another 25 basis points before pausing for the rest of 2023. This comes after Saudi Arabia and some members of the Organization of the Petroleum Exporting Countries (OPEC) recently decided to cut oil production, which could make the central bank’s mission more complicated. Additionally, the market is currently pricing in a 0.25% increase for the May 3 meeting of the Federal Open Market Committee (FOMC), and many analysts believe it may be the last hike for quite some time.

Investors are watching several factors, including the Consumer Price Index (CPI) report and earnings reports from some of the largest banks in the United States. However, the main focus is on the FOMC meeting, where the Federal Reserve may potentially raise the federal funds rate. There is a 66% chance that the Fed will raise the rate by 25 basis points, but there is a 34% chance that the Fed won’t raise the rate in May. Some believe that after a 25 bps rate hike, May will be the last increase for 2023.

The recent decision by Saudi Arabia and OPEC to cut oil production could affect the Fed’s future policy, as the Fed tends to focus on the production of goods and transportation of other items, which can be impacted by higher oil prices. Economists surveyed by Bloomberg Economics expect the federal funds rate to reach 5.25% at the end of 2023. Even with inflation slowing down, it is likely to remain around 4% in 2023, which may keep the Fed from rate cuts.

Investors have shifted their focus away from inflation and are now fixated on a recession. With a recession likely to develop in late-2023, portfolio manager Michele Morra believes that the main focus is on a recession. Bloomberg economist Tom Orlik believes that the interest rate will soon peak for various reasons, including tighter US labor markets, faster China reopening, and Europe dodging a downturn. Peak rates are in sight, but we’re not quite there yet, according to the economist.

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