FED in A Difficult Position in May’s Meeting

Posted Wednesday, May 3, 2023 by
Skerdian Meta • 2 min read

Markets have been expecting the FED to stop rate hikes after today’s 25 bps hike, which is not a certain thing by the way. Although it seems like the Federal Reserve is in a tough spot once again, as US regional banks are facing pressure ahead of the May meeting, which is very important. The markets will be closely watching to see if the FED will offer any relief after the recent market jitters. The main focus will be on the interest rate decision, and whether the FED will raise rates by 25 basis points or not.

If the FED decides to raise rates, there could be a heavy sell-off in regional banks, as policymakers may be seen as drawing a line following the recent failure of First Republic and concerns over other banks like PacWest and Western Alliance. However, the Fed tends to pacify markets and go with what is expected, in order to maintain balance and order. This is a strategy that has been in place since Yellen took over and has continued under Powell’s leadership.

On the other hand, if the Fed chooses not to raise rates, this could create a credibility issue as it may be seen as a lack of resolve to combat inflation. Furthermore, if regional banks still face difficulties and the markets react poorly, the Fed will be seen as losing both credibility on the inflation front and failing to appease the markets.

In this context, if the Fed decides to raise rates by 25 basis points, Powell can still try to calm the markets by suggesting that the tightening cycle will pause in the future. This could help alleviate some of the concerns around regional banks and potential market reactions. But, that would still be bearish for the USD, since it would keep the same scenario as the current one, and the USD has been on the back foot due to this. EUR/USD and GOLD are higher again today after the bullish reversal yesterday and chances are that they might push higher after the FED. Although, let’s see what Powell will say first.

Gold Live Chart


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