Federal reserve hits pause button on rate hikes
Fed holds rates steady, signals potential year-end rate hike amidst economic assessment
Fed pauses tightening campaign, signals potential rate hike
Projections show higher funds rate of 5.6% for this year
ECB set to raise interest rates, accelerate quantitative tightening
Federal Reserve pauses tightening campaign, but signals potential rate hike
The Federal Reserve, as widely anticipated, chose to keep the target for the funds rate unchanged at 5%-5.25%. However, the central bank also indicated that rates may be raised to 5.6% by the end of the year if the economy and inflation do not slow down further. This marks the first pause in the tightening campaign after ten consecutive rate hikes that pushed borrowing costs to their highest level since September 2007. Policymakers explained that maintaining the current target range allows them to evaluate additional information and its implications for monetary policy. Nevertheless, they emphasized their readiness to make adjustments if risks arise that could hinder the achievement of their objectives.
Projections from the Federal Reserve now indicate a higher funds rate of 5.6% for this year, compared to the 5.1% forecasted in March. Similarly, upward revisions have been made for 2024 (4.6% vs 4.3%) and 2025 (3.4% vs 3.1%). GDP growth is expected to rise by 1% this year, surpassing the previous estimate of 0.4% from March. However, forecasts for 2024 (1.1% vs 1.2%) and 2025 (1.8% vs 1.9%) have been adjusted downward. Additionally, the projection for PCE inflation this year stands at 3.2%, slightly lower than the 3.3% predicted in March.
ECB to raise interest rates
The European Central Bank is anticipated to implement another interest rate hike of 25 basis points on Thursday, thereby raising borrowing costs to levels not seen since the 2008 financial crisis. This move by the ECB is expected to be accompanied by an acceleration in the pace of quantitative tightening. Investors will be closely monitoring the guidance provided by ECB officials, particularly regarding future interest rate increases. Of particular concern is the current inflation rate, which stands at 6.1%, well above the ECB's target of 2%, as well as the core inflation rate of 5.3%. Market participants will also be attentively analyzing President Christine Lagarde's press conference for any indications of when interest rates may reach their peak. Market expectations suggest a single additional quarter-point rate hike may occur in July. Notably, the ECB has already raised rates by an unprecedented 375 basis points over the past year, making it the fastest tightening pace in the history of the central bank.
Despite the forthcoming interest rate hike by the ECB, the euro has maintained its resilience, trading above $1.08 and nearing its one-month peak of $1.0863 achieved on June 14.
Japanese Yen depreciates
On the other hand, the Japanese yen has experienced depreciation against the dollar, reaching around 141 yen per dollar, a level not seen since November. The Bank of Japan is expected to maintain its ultra-easy monetary policy this week due to the counteracting factors of Japan's economic recovery and slowing global growth. BOJ officials have repeatedly emphasized their commitment to sustaining substantial stimulus until the target of 2% inflation is attained in a sustainable and stable manner.