May 2023 US Interest Rate Decision – 25bp Hike

Breaking News – the Federal Open Market Committee (FOMC) announced a 25bp rate hike in May 2023.

The Federal Open Market Committee (FOMC), a committee within the Federal Reserve, convenes eight times a year to provide updates or announce changes to US monetary policy and interest rates. In the past year, the FOMC has been under the spotlight due to record-high inflation, with interest rates serving as one of the most effective tools for curbing this economic challenge.

Leading up to today’s FOMC meeting, the majority of analysts anticipated a 25 basis point hike in order to achieve the projected 5% peak rate. This forecast was based on the expectation that the Federal Reserve would maintain rates around the 5% peak “until something breaks,” meaning they would continue to tighten markets with higher interest rates until clear signs of economic stress emerge.

Despite several US banks experiencing failures between Q1 and Q2 2023, the Federal Reserve and the Department of Treasury maintain that they are in control and capable of preventing any systemic risks to the US banking system. In light of these assurances, analysts are increasingly considering the possibility of maintaining a 5% peak rate (or slightly higher), and no rate reductions earlier than Q3 to Q4 2023. While it’s still too early to make definitive predictions, if banks continue to falter or fail, the Federal Reserve might be forced to retreat from their hawkish outlook.

For those reading this during the FOMC press conference, it’s crucial to exercise extreme caution when trading. Federal Reserve Chair Jerome Powell’s speech has the potential to cause significant market volatility—more so than almost any other economic event. As such, only experienced traders should attempt to navigate the market during this time.