The Federal Reserve’s rate hike trajectory appears unperturbed by recent news of a dominant U.S. bank’s scandal that could potentially impact the industry’s reputation. Fed-fund futures traders are pricing in a scenario where Federal Reserve policy makers might overlook recent banking-sector developments and continue hiking interest rates through May. This is significant news as it heavily impacts the financial markets and thus the economy in the greater scheme of things.
So what exactly does this mean? A 73% chance of a quarter-of-a-percentage-point rate hike for Wednesday is currently being seen, up from 62% on Friday. This would be the first rate hike for this year, taking the fed-funds rate target to a range of 4.75% to 5%. This shift in percentage points may appear small, but in the wider picture, it carries a lot of weight for the U.S. economy. According to CME Group’s FedWatch tool, traders boosted the chances for another quarter-point hike in May to 36% versus 20.7% previously, indicating that the markets believe the Fed is unlikely to slow down hikes anytime soon.
The decision to hike rates relies heavily on the Fed’s outlook for the economy. The health of the U.S. job market and business sentiment paint a favorable view of growth prospects. The unemployment rate currently sits below the Fed’s target level and has steadied, while inflation has recently started to increase toward the 2% target famously coveted by the Fed. All these signs indicate that the economy is well on its way to achieving its growth targets this year.
Aside from the good news of growth prospects, the Federal Reserve may have decided to overlook the news of the scandal involving the U.S.’s largest bank, Wells Fargo. The bank was recently fined $1 billion following revelations that employees had opened fake accounts to meet sales goals. While this news sent ripples through the banking sector, it appears to have not impacted the Fed’s interest rate hike decision significantly. By doing so, the Fed appears to have signaled its commitment to keeping rates on the path toward normalization. A normalization in interest rates means that the economy is heading toward a state of equilibrium and not subject to severe shocks or artificially induced volatility.
Market participants are constantly questioning the Fed’s next move and the basis behind their decision making. In a sense, the Fed is the watchdog of the U.S. economy and must constantly adapt to different scenarios to ensure that the economy is growing sustainably. What is the basis then behind their decision to hike rates despite the recent Wells Fargo scandal and last year’s scandals involving other financial institutions like Equifax?
It is important to note that while these events are concerning, they may not necessarily have a substantial impact on the economy in the long term. Unless the issues continue to snowball and have a systemic effect on the financial system, the Fed will continue on its mandate to keep inflation in check while keeping the economy on a sustainable growth path. Furthermore, deciding the interest rates is not dependent on singular events, but is instead a culmination of multiple factors, such as how the market is performing, the global economic situation, and ongoing economic momentum.
While the rate hike may be unsettling for those holding debt, it is a welcome change for those who rely on interest on their savings. Furthermore, the Fed often moves slowly, and rate hikes are not made impulsively, allowing market participants to adjust and factor in changes gradually. It is also worth noting that hikes might not necessarily take place in every quarter of the year, depending on the state of affairs, so we advise market participants to stay cautious and stay up to date with developments.
The interest rate hike will impact a range of industries, from housing to banking, but it ultimately signals a possibility of a stable economy in the long run. Those in the housing industry should expect mortgage rates to go up, while banks can expect the cost of borrowing money to increase. These changes, however, should not be excessively worrying given that the hikes are not significant enough to seriously impact business operations. Instead, we believe that they will be mostly felt by short-term markets like bonds, which tend to suffer when rates are rising.
In conclusion, traders are pricing in a possibility of a rate hike for Wednesday, despite recent news of the Wells Fargo scandal. The Fed seems committed to a trajectory of normalizing interest rates and keeping the U.S. economy on a sustainable growth path. While the Fed’s decision may be ruffling a few feathers, it is ultimately promoting stability in the long term, which can only be beneficial for the economy.
