The U.S. Federal Reserve opened its policy session this week to decide whether to raise rates again. The chair, Jerome Powell, will disclose the decision the next day, and markets in the United States and Canada are pricing in a 0.25% lift. This would be the tenth consecutive increase since March 2022 and could signal the close of the current tightening cycle. Following the stumble in the U.S. banking sector after the collapse of First Republic Bank, investors are closely watching for signals. Market chatter suggests traders expect Powell to hint at a possible pause or a gradual pace, but his remarks will carry significant weight. If Powell leaves room for further hikes, volatility could surge across trading desks. One IG analyst notes that the operating environment remains tense for many market participants.
Regional US banks leave 20% of their value on Wall Street after First Republic’s fall
With concerns about financial stability weighing on sentiment, the Fed is anticipated to hold off on further increases after the May decision. A recent report from EFE, citing Silvia Dall’Angelo, senior economist at Federated Hermes, points to a 0.25% rise as the baseline scenario. In another briefing, Gilles Möec, chief economist at AXA IM, supports a 25 basis point move and stresses that the longer the policy remains restrictive, the more important duration becomes for inflation management. In separate commentary, analysts foresee a final 25 basis point increase, while the key question shifts to how long the elevated stance should persist.
The European Central Bank is aligned to decide this week whether to tighten again. Market observers, including Sergio Ávila, note that traders are pricing in at least two additional hikes beyond those already baked in, implying a 25 basis point maneuver at the upcoming meeting. Inflation in the euro area remains stubborn, with April numbers hovering around 7%, reinforcing the case for prudent tightening. Craig Erlam, a market analyst at Oanda, suggests that a 25 basis point hike could be supported by a continued rise in inflation expectations in the months ahead.
Uncertainty in the banking sector
At the prior FOMC gathering in March, the committee faced turbulence triggered by the failures of Silicon Valley Bank and Signature Bank, along with the rescue of First Republic Bank. The decision to raise rates by a quarter point reflected concerns about stability and the inflation outlook. Powell signaled at the press conference that the path of further rate hikes may require careful calibration as inflation evolves. Last week, equities were jolted again by sharp declines in First Republic’s stock, though top officials, including Powell, have reiterated that a broader crisis is not anticipated. This stance remains under constant evaluation as new data arrives.
The crisis appeared to ease after JPMorgan Chase announced it would acquire certain assets, yet no one can guarantee that fresh disruptions won’t surface in the banking sector. The Fed remains committed to returning inflation to 2%. The latest measures show the year-over-year inflation rate continuing a downward trend through March for the ninth straight month, around 5%, one percentage point lower than the prior month. This trajectory supports policymakers as they balance cooling inflation with maintaining financial stability, a balance closely watched by households and businesses across Canada and the United States.