In March 2022, the Federal Reserve Bank initiated an aggressive interest rate hiking policy as its primary means to fight back against inflation that was climbing to levels unseen in decades. Over a year later, the Fed has proceeded with ten successive rate increases of up to 75 bps, bringing the Fed’s benchmark rate to a target range of 5-5.25%, the highest in nearly 16 years.
Inflation is showing signs of responding to this hawkish approach and has steadily deflated since its peak at 9.1% in June 2022. According to the latest Consumer Price Index (CPI) released by the Bureau of Labor Statistics, prices for goods and services increased by 4.9% in April 2023 compared to the previous year. It is the first time in two years that the annual inflation rate sits below 5%. However, it is still noticeably higher than the Fed’s targeted 2% inflation rate.
The Federal Reserve Bank is set to meet June 13-14 to decide on its next move. Policymakers have been walking a thin line to develop a policy aggressive enough to curb inflation without throwing the American economy into a recession. For the first time in over a year, the Federal Open Market Committee (FOMC), which is in charge of the big monetary policy decisions for the Fed, may be ready to pause its hiking strategy.
Economists See Signs For Optimism
The U.S. economy has been surprisingly resilient despite the stubbornly high inflation rates. The Fed’s balance sheet has dropped from a record high of $8.96 trillion in May 2022 to around $8.5 trillion in May of this year, but it remains more than twice its pre-pandemic size of $4.15 trillion in late February 2020. The job market continues to be strong, with a steady 3.4% unemployment rate. Despite a highly publicized banking crisis, including the failures of Silicon Valley Bank, Signature Bank, and First Republic, the Fed claims to be confident that the banking system overall and the economy, in general, can withstand the storm.
Some experts seem to be confident that the worst is behind us and that the Fed is set for a break. “The Fed will more likely than not hold its policy rate unchanged at the June decision,” says Bill Adams, chief economist for Comerica Bank. “Annual CPI inflation will very likely slow in the May release immediately before the Fed decision, since gasoline prices are down so far from April and [Producer Price Index] inflation—which tends to lead CPI—slowed sharply last month.”
Nevertheless, Fed officials remain cautious and do not exclude another quarter-point increase next week. “The data in coming weeks could yet show that it is appropriate to skip a meeting. As of today, though, we aren’t there yet,” says Dallas Fed President Lorie Logan.
We’ll keep you updated on further developments. In the meantime, if you’d like more information about buying/selling or refinancing in today’s market, give us a call or drop us an email.
