The Fed will likely raise rates for the fourth time since the financial crisis tomorrow. However, will these be the last time they do so this year?
The consumer has created a downward pressure on the US economy, spending less than anticipated thanks to lagging wage growth. Additionally, higher housing prices and tight credit standards have chocked the US economy and tampered growth. While investment is finally tipping up it has not reached the consumer’s pockets.
Lagging inflation has also been a huge deterrent for the Fed. A succession of weak inflation data amid a nation of strong hiring is a conundrum for the Fed. Core inflation underperformed in March and April. Meanwhile, unemployment figures were lower than analysts forecasted.
Thus, while the Fed will probably raise rates, President Janet Yellen’s statement will likely be dovish, reiterating the stubbornness of both inflation and wage growth. Investors should look out for a possible change to the dot plot or the medium forecast for future rate increases. There may be a downward prevision to inflation, given the lack of stimulation. This is negative for the dollar, we may see it slide during tomorrow’s statement.
The Fed not only took on an ultra-low interest rate policy to stimulate the economy after the financial crisis, the body also increased its balance sheet by $3.5tn by conducting a bond-purchasing programme.
Focus has turned to this deficit and expects to begin to unwind the balance sheet this year. Wednesday’s meeting may include the Fed’s plan to bring the balance sheet back to ‘’normalisation’’