After the Federal Reserve’s rate hike in March, economists say the recent move by Saudi Arabia and several members of the Organization of the Petroleum Exporting Countries (OPEC) to cut oil production could complicate the mission of the central bank. Additionally, the majority of the market is forecasting another 0.25% rise for the May 3 meeting of the Federal Open Market Committee (FOMC), and several analysts suspect it could be the last rise in some time. .
Economists try to predict the Fed’s next move – “Peak rates are in sight”
This week, market investors are focusing on several factors, including the Consumer Price Index (CPI) report and earnings reports from some of the largest banks in the United States. However, one of the main factors that investors are eyeing will happen in 23 days when the Federal Open Market Committee (FOMC) meets to potentially raise the federal funds rate. According to CME Group statistics Fed watch tool, there is a 66% chance that the Fed will raise the rate by 25 basis points (bp). Conversely, there’s a 34% chance the Fed won’t raise the rate in May, and some believe that after a 25 basis point rate hike, May will be the last hike for 2023.
Although the Federal Open Market Committee (FOMC) will be watching this week’s CPI report, Senior Economist Sarah House of Wells Fargo described how the recent decision by Saudi Arabia and OPEC to cut production of oil could affect future Fed policy. “The Fed sees OPEC decisions as primarily geopolitical, but they can impact the production of goods and the transportation of other items, so these higher oil prices can ripple through this critical component, which the Fed tends to focus a bit more on in terms of setting policy,” House explain to CNN reporter Bryan Mena.
Economists interrogates by Bloomberg Economics expect the fed funds rate to reach 5.25% by the end of 2023. Economist Anna Wong said in the forecast: “We expect the Fed to rise another 25 basis points when from its May meeting, when the upper limit for federal funds reached 5.25%. With recent OPEC+ production cuts and the still tight US labor market, inflation is likely to stay around 4% in 2023 and prevent the Fed from lowering rates as markets currently expect. Wang added:
We see the Fed holding rates at all-time highs for the duration of this year, although a mild recession is likely to develop at the end of 2023.
Portfolio Manager Michele Morra at Moneyfarm believes that investors have turned their attention away from inflation and are now obsessed with a recession. With inflation slowing and “even taking into account a more accommodative monetary policy, the main objective is recession,” Morra said. Bloomberg economist Tom Orlik believes the interest rate will soon peak for a variety of reasons.
Economist Tom Orlik told Bloomberg Economics: “Since the start of the year, central banks have been rocked by rival forces. A faster reopening of China, Europe avoiding a slowdown and tight U.S. labor markets all argue for higher rates. The collapse of Silicon Valley Bank and Credit Suisse pulls in the opposite direction. So far, with limited signs of a broader banking crisis, the case for tightening is winning. Peak rates are in sight, but we’re not there yet,” the economist added.
What do you think of the economists’ predictions? How do you think the recent OPEC+ oil production cuts will impact future Fed policy decisions, and how will this affect the economy and financial markets? Share your thoughts on this topic in the comments section below.
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