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The US Federal Reserve is expected to leave interest rates unchanged on Wednesday as May inflation numbers were mostly in line with expectations. However, Fed watchers don't rule out a hike in July.
According to the CME FedWatch tool, bankers and traders see a 95% chance of the Fed skipping a rate hike this month. However, they see a 63% chance of a 25-bps (basis points) rate hike in July.
In its battle to contain inflation, the Fed has raised rates ten consecutive times since March 2022 to the current level of between 5.0% and 5.25%.
Two weeks ago, Philadelphia Federal Reserve President Patrick Harker said he is inclined to support a "skip" in interest rate hikes at the central bank's June meeting.
“The US central bank is now 15 months and 10 consecutive rate increases into its battle to cool red-hot inflation, but markets will be expecting that the latest CPI report will now be enough to convince officials to hit the pause button,” said Nigel Green, the CEO and founder of deVere Group.
Swiss bank Julius Baer also also said the latest inflation reading is unlikely to change the Fed’s intention to pause its rate hike campaign this week so that it can use the time to access the effects of past rate hikes.
"We expect this week’s FOMC meeting to leave the Fed funds target range unchanged at 5.00% to 5.25%," David Kohl, Chief Economist, said in a note.
The monthly Consumer Price Index data released on Tuesday morning showed the US annual inflation rate had slowed to 4% year-on-year, from 4.9% in April mainly due to cooling food and energy prices.
The May CPI numbers indicated the smallest annual growth since March 2021, Reuters reported.
Green said: “Investors need to stay grounded as despite a possible pause, more rate rises are likely this year, which would be a negative shock to stock markets.
“Inflation is certainly coming down so far, but it is very, very gradual. It remains sticky and a long way from the 2% target, largely due to a tight labour market.
Dubai-based lender Emirates NBD also believes the Fed will hold rates for now.
"Given that the May inflation data was broadly in line with expectations and shows price growth moving (slowly) back towards the 2% target, the Fed will likely keep rates unchanged today. However, high services inflation, combined with a tight labour market and robust wage growth may persuade some policy makers that another 25bp rate hike is warranted next month. This would be reflected in the new dot plot, also due today," Emirates NBD said in a note on Wednesday.
(Reporting by Brinda Darasha; editing by Seban Scaria)
