The upcoming US Federal Reserve meeting will be held on Wednesday amid turmoil hitting the US banking sector and JPMorgan's acquisition of First Republic Bank.
UK's The Financial Times highlighted this meeting and gathered the opinions of specialists about the expected scenarios in light of the decisions that will be issued.
The newspaper mentioned that several Federal Reserve officials stressed the need for ‘flexibility and optionality’ at its last policy meeting in March, as a string of bank failures injected new uncertainty into its fight against persistent inflation.
The Federal Open Market Committee meets 8 times every year at different dates in order to determine and set the main interest rates.
The newspaper explained that this approach of 'flexibility and optionality' will remain a priority for members of the Federal Open Market Committee at this weeks policy meeting, which could deliver the final interest rate rise of a historic monetary tightening campaign.
Markets anticipate another increase of a quarter of a percentage point, bringing the benchmark federal funds rate from close to zero just over a year ago to a new target range of 5 to 5.25 per cent. The focus for economists is not the rate decision itself but the guidance that Fed officials provide about their future intentions.
As recently as March, most Fed officials saw 5 to 5.25 per cent as this years peak rate. Officials this week are set to revive debate over whether it is time to pause further increases.
The newspaper mentioned that enduring concern that inflation is still far too high has made it difficult to rule out further rate rises, even as turmoil in banking sparks worries over tougher credit conditions. The meeting concluding on Wednesday comes on the heels of the fourth US bank failure since March, with the shutdown of California-based First Republic.
Karen Dynan, a former senior Fed staffer, said "theres little doubt that given how high inflation still is...they are going to need to keep policy tight, but I think there is a serious case to be made that we are reaching a peak with interest rates."
The Financial Times noted that when the Fed last revised guidance in March, the policy committee signaled it was closer to ending its rate-rising campaign than just a few months ago.
Economists believe that while the Fed may not raise rates again at its meeting in June, it could still tighten policy further. They think the Fed will echo the language it used towards the end of a previous rate-raising cycle in 2006, when it declared that "the extent and timing of any additional firming that may be needed will depend on the evolution of the outlook for both inflation and economic growth.
Sebnem Kalemli-Ozcan, an economist at the University of Maryland and a member of the New York Feds economic advisory panel, said that striking the right balance is critical, adding that if officials nod too clearly towards a pause and the economic data suggests even higher rates are necessary, it could force them to backtrack. "That is very dangerous," she said. "That is exactly the situation I think they should avoid."
Inflation data has been somewhat mixed in recent weeks. First-quarter wage data came in stronger than expected, with the so-called employment cost index now up at least 1.1 per cent in each of the past seven quarters. Thomas Simons, senior economist at Jefferies, said Fed officials "have to be alarmed that there hasnt been any material slowing here".
Core US inflation has slowed per the personal consumption expenditures price index, but the underlying pace still remains elevated at nearly 4.5 per cent.
An expert said that he does not forecast the Fed cutting rates until 2024, given his view that inflation will descend slowly from here and without a sharp downturn in the economy.
The newspaper said that the biggest unknown stems from turbulence in the US banking system. After a tense weekend of negotiations, the Federal Deposit Insurance Corporation early on Monday orchestrated a deal with JPMorgan Chase for the countrys largest bank to acquire most of First Republic, resulting in the second-biggest bank failure in US history.
Fueling further uncertainty is a looming deadline to raise the federal debt ceiling, which Treasury secretary Janet Yellen on Monday warned could be breached as early as June 1. A default would be an economic catastrophe, policymakers have warned.
