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• Fed is expected to raise interest rates for the second time since 2018
• Expected to launch a program to reduce its $9 trillion holdings by $95 billion a month, starting in June
The Federal Reserve is widely expected to raise its rates by half a percentage point at the end of a policy meeting scheduled to be held on Wednesday with soon start trimming its asset holdings.
However, investors are more focused on decoding signals on whether the central bank could get even more aggressive with future rate hikes.
The Fed is expected to start winding down its roughly $9 trillion balance sheet by $95 billion a month, starting in June.
Last month, Fed Chair Jerome Powell said that the May meeting could raise interest rates by 50 basis points.
The 50-basis-point hike would put the funds’ target rate range at 0.75% to 1%.
After the upcoming hike announcement on Wednesday, the Fed funds target rate would be well off zero but way below the market’s expectations for a funds rate above 2.8% by the end of this year.
The Federal Open Market Committee (FOMC) meeting will be critical, given the slowing in some economic data while inflation is still hot.
Economic growth contracted by 1.4% in the first quarter of 2022. However, economists say it was distorted by trade data, and they expect the second-quarter GDP to bounce back.
“I think they’re going 50 [basis points], and it seems like they’re dead set on hiking rates enough to kill inflation,” said Jim Caron, the chief fixed-income strategist on the global fixed-income team at Morgan Stanley Investment Management, told CNBC.
“But that’s the real debate. Are they trying to get to target inflation by 2024? If they are, the wage inflation is pretty high, and that will require even more tightening than the Fed is projecting.”
In March, the US central bank raised the short-term benchmark interest rate for the first time in three years by a quarter percentage point or 25 basis points.
Picture Credit: FT
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