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Fed hikes by 25 basis points in May

At the meeting on 2–3 May, the Federal Open Market Committee (FOMC) increased the target range for the federal funds rate by 25 basis points to 5.00–5.25%.

The decision was aimed at containing core and headline inflation, which are still both well above the Fed’s 2.0% target. Moreover, domestic activity has been robust: The economy has continued to create jobs at a brisk pace in recent months, and consumer spending growth accelerated in Q1. Together with the Fed’s judgment that the banking system remained “sound and resilient”, the strong economy provided the leeway to hike.

Forward guidance grew more dovish, with the Fed dropping the previous meeting’s statement that “some additional policy firming may be appropriate”. This suggests that the Bank is at, or very close to, the peak of its tightening cycle. Real-sector indicators, inflation and banking developments will all be closely watched ahead of the next meeting in mid-June. Most of our panelists do not see any more rate hikes ahead, although a minority see 25–50 basis points of extra tightening later this year.

Commenting on the outlook, analysts at the EIU said:

“We had previously expected the Fed to make a final 25-basis-point rate increase at its June meeting, but recent banking sector turmoil, together with the looming debt-ceiling crisis, have made it likely that the Fed will pause its tightening cycle.”

In contrast, Commerzbank analysts are more hawkish:

“We see the rate peak slightly higher at 5.5%, as inflationary pressures are likely to remain high. Before the Fed cuts rates again, price pressures will probably have to have eased significantly.”