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Will the Federal Reserve Really Raise Interest Rates in May?

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On April 14th, it was reported that futures linked to the Federal Reserve\’s policy interest rate continued to bet on Friday that the Federal Reserve would raise interest rates by a

Will the Federal Reserve Really Raise Interest Rates in May?

On April 14th, it was reported that futures linked to the Federal Reserve’s policy interest rate continued to bet on Friday that the Federal Reserve would raise interest rates by another 25 basis points in May. Previously released data showed that US retail sales were not as weak as expected last month. The short-term interest rate futures market in the United States reflects that the market believes that the possibility of a rate hike in May is about four times higher than that of not raising rates, slightly higher than the possibility before the report is released. The current target range is 4.75% -5.00%.

The latest retail sales data shows that the Federal Reserve is expected to raise interest rates

Introduction

On April 14th, it was reported that futures linked to the Federal Reserve’s policy interest rate continued to bet on Friday that the Federal Reserve would raise interest rates by another 25 basis points in May. Previously released data showed that US retail sales were not as weak as expected last month. The short-term interest rate futures market in the United States reflects that the market believes that the possibility of a rate hike in May is about four times higher than that of not raising rates, slightly higher than the possibility before the report is released. The current target range is 4.75% -5.00%.

The Current State of the US Economy

Before diving into the potential interest rate hike, it’s important to understand where the US economy currently stands. According to the US Bureau of Labor Statistics, the unemployment rate in March 2021 was 6.0%. While this is an improvement from the height of the pandemic, it’s still higher than pre-pandemic levels. Additionally, inflation has been a concern, as the Consumer Price Index (CPI) rose 0.6% in March, the biggest increase since August 2012.

Previous Interest Rate Hikes

The Federal Reserve has already raised interest rates three times in the past few years, with the most recent hike in December 2018. These past hikes were made to combat inflation and strengthen the economy. However, the COVID-19 pandemic forced the Federal Reserve to cut interest rates to nearly zero in March 2020.

Market Predictions

Currently, the market is predicting that the Federal Reserve will raise interest rates in May by 25 basis points. The futures market is reflecting a 68% chance of a rate hike, which is slightly higher than before the release of the US retail sales data. Additionally, the futures market is predicting several more rate hikes in 2022 and 2023.

Factors that Could Impact the Interest Rate Decision

There are several factors that could influence the Federal Reserve’s decision regarding interest rates. One is inflation. If inflation continues to rise at a faster pace than expected, the Federal Reserve may choose to raise interest rates to combat it.
Another factor is the state of the US economy. While unemployment rates have been improving, there are still concerns about the pace of the economic recovery. If the Federal Reserve believes that the economy is not yet strong enough to withstand an interest rate hike, they may postpone any decisions.
Finally, global issues could also impact the decision. The COVID-19 pandemic is still a concern and its impact on the global economy could influence the Federal Reserve’s decision.

Potential Impacts of an Interest Rate Hike

If the Federal Reserve does decide to raise interest rates in May, there could be several impacts on the economy. One is on borrowers. Those with adjustable-rate mortgages, for example, could see an increase in their monthly payments. Additionally, borrowers who rely on short-term loans, such as credit cards or personal loans, may also see higher interest rates.
On the other hand, savers could benefit from a rate hike. Higher interest rates could result in higher yields on savings accounts and certificates of deposit.

Conclusion

The market is predicting that the Federal Reserve will raise interest rates in May by 25 basis points. However, there are several factors that could impact the decision, including inflation, the state of the US economy, and global issues such as the COVID-19 pandemic. If the Federal Reserve does decide to raise rates, borrowers could be impacted while savers could benefit.

FAQs

1. What is the current target range for the Federal Reserve’s policy interest rate?
A: The current target range is 4.75% – 5.00%.
2. Why does the Federal Reserve raise interest rates?
A: The Federal Reserve raises rates to combat inflation and strengthen the economy.
3. How could an interest rate hike impact borrowers?
A: Borrowers with adjustable-rate mortgages or short-term loans could see an increase in their monthly payments.

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