US Fed may raise interest rates in May

According to a recent poll of economists cited by the World Economic Forum, the US Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then maintain a steady rate for the rest of 2023. The poll also revealed that there is likely to be a short and shallow recession in the US this year.

Concerns about an economic downturn have encouraged markets to price in a 25-basis-point cut by the end of 2023, but this looks less likely due to inflation that is well over twice the Federal Reserve’s 2% target, ongoing strength in the labour market, and a significant easing in banking sector stress over the past few weeks. This indicates that higher rates are more probable than a rate cut.

In the past month, US two-year Treasury yields have increased by nearly 75 basis points as still-strong data have reduced the possibility of rate cuts. The chief US economist at BofA Securities, Michael Gapen, noted that despite the slowdown in inflation in March, there is still more work to be done to reach the 2% target.

The Federal Reserve also raised concerns about an economic downturn at its policy meeting in March, prompting economists to predict a short and shallow US recession. Nevertheless, the expectation is that the Fed will raise rates in May and hold steady for the rest of the year to combat inflation and maintain stability in the labour market.