San Francisco Frontiers - Fed begins rate talks that could herald end of hikes

The Fed has been on an aggressive campaign of interest-rate hikes since March last year, rapidly raising rates to help target high inflation, which remains above its long-term target of two percent.

With the Federal Open Market Committee (FOMC) widely expected to raise its base rate a quarter-point on Wednesday, analysts will be looking for any "revisions to the forward guidance in its statement," Goldman Sachs' chief US economist David Mericle wrote in a recent note to clients.

"We expect the Committee to signal that it anticipates pausing in June but retains a hawkish bias, stopping earlier than it initially envisioned because bank stress is likely to cause a tightening of credit," he said.

Futures traders also see a more than 95 percent chance that the Fed will raise its benchmark lending rate by 25 basis points on Wednesday, according to CME Group.

Such a move would bring the interest rate to between 5 and 5.25 percent -- its highest level since before the global financial crisis.

- Uncertainty remains -

Like the Fed's previous rate decision, the FOMC meeting on May 2 and 3 takes place shortly after one of the largest bank failures in American history.

First Republic's failure on Monday beat Silicon Valley Bank's (SVB) dramatic collapse to second place in the unenviable list of the largest commercial banking failures in US history.

In March, the Fed held off a larger rate hike, instead opting for a quarter-point rise amid a banking crisis unleashed by SVB's collapse.

First Republic's failure has not sent the same shockwaves throughout the financial markets -- despite some volatility in regional banking stocks -- and most analysts still expect the Fed to plow ahead with another quarter-point hike on Wednesday.

JPMorgan agreed to buy First Republic from federal regulators in a deal announced in the early hours of Monday morning.

"I think this is going to stabilize the system, which is a good thing," JPMorgan chief executive Jamie Dimon said in a call with reporters shortly after the deal was announced.

The likelihood of the Fed giving firm guidance on a future pause is far from a done deal, according to some analysts.

"With inflation remaining stubbornly elevated, we expect the Committee to maintain a tightening bias and repeat the language from March," Deutsche Bank economists wrote in a recent note to clients.

K.Gray--SFF