By
Bhushan Akolkar
April 17th, 2024
At the moment, the terminal rate is projected to be at 3.8% in 2023, but from the current inflation and its handling, the Fed will have to adjust these figures as well.
The United States Federal Reserve Open Market Committee (FOMC) is expected to conclude its 2-day meeting and the world is keenly anticipating how much it is set to increase the interest rates. From the general expectation, economists are anticipating a 75% hike, a move which if achieved will represent the third time that such an interest rate will be pronounced by the Fed.
The economy is at a tipping point as inflation has remained sky-high. The Federal Reserve considers the interest rate hikes as one of its bold attempts to curb inflationary growth, and it is set to do this no matter the cost. Based on its determination, some analysts are even projecting that the Fed may reveal a higher than expected interest rate hike which could be up to 100 basis points.
Following the FOMC meeting, Fed Chair Jerome Powell is set to give an address by 2:30 p.m. ET. The speech is expected to detail plans to continually hike interest rates until the inflation level is lowered to the expected range below 4% from the current 8.3% recorded in August.
“I think he puts up a bulletin board behind him that says ‘Inflation Has to Come Down,’” said Rick Rieder, BlackRock chief investment officer for global fixed income. “I think he’s going to talk tough.”
In a surprising move, the futures tied to the S&P 500 (INDEXSP: .INX) rose by 0.23% while those tied to Nasdaq 100 and the Dow Jones Industrial Average (INDEXDJX: .DJI) went up 0.10% and 0.6% respectively.
The potential interest rate hike will mean a lot for the broader financial ecosystem and is bound to determine the rate of recovery of most tickers of the US economy. The Fed must have considered all odds and whatever rate hike is announced will be expected to help fulfill all expected targets.
Federal Reserve to Increase Interest Rate and Terminal Rate
More than just the announcement of the interest rate hike is expected from the Federal Reserve as other key forecasts are meant to be unveiled. One of these forecasts is the ‘Terminal Rate’ and it represents the level at which the interest rates will peak before the Feds stop their aggressive rate hikes.
At the moment, the terminal rate is projected to be at 3.8% in 2023, but from the current inflation and its handling, the Fed will have to adjust these figures as well.
Economists from Citigroup Inc (NYSE: C) are expected the terminal rate to go as high as 5% while analysts from Goldman Sachs Group Inc (NYSE: GS) believe it will be in the 4% to 4.25% range at year-end. The strategists expect this rate to grow from a peak of 4.25% to 4.5% in 2023. Should these estimations come to reality, they then expect a cut in 2024 and two more in 2025.