Investors Expect Fed To Pause Interest Rate Hikes, But Global Trends Indicate The Relief May Be Fleeting

As the Fed's Federal Open Market Committee (FOMC) gears up for its fourth annual meeting, investors are starting to weigh the possibility that this time, no hikes will be applied to the federal funds rate.

Talks of a pause on hikes were already circulating one month ago, as consumer inflation for April was unveiled at 4.9%, further cementing the notion that prices are on a slow but steady trajectory of disinflation.

Fed Governors will meet on Tuesday and Wednesday in the latest edition of a recurring meeting that resulted in a hike of interest rates the last 10 consecutive times, taking the current funds rate to between 5% and 5.25%.

While the expectation of a temporary hold is the dominating sentiment, this prediction is not set in stone. The Fed will likely be taking a close look at the course of inflation during the month of May. The latest Consumer Price Index results will be released on Tuesday morning, just as Fed Governors launch their meeting.

According to Forbes, Interest Rate futures reflect a 75% possibility of a pause, against 25% odds of another hike.

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A trip around the world: The inclination to halt increases in interest rates has recently been as widespread worldwide as inflation itself.

Australia, where the current inflation rate of 7% is nearing the 30-year high of 7.8%. The country’s central bank skipped a hike at its April meeting and resumed the raises in May. Currently, the benchmark interest in the Land Down Under is 4.1%.

The UK's consumer price index shows a yearly inflation rate of 7.8%. The Bank of England has raised interest rates at its last 12 consecutive meetings, but Governor Andrew Bailey, who also chairs the Monetary Policy Committee, told Bloomberg last month that a pause was likely at the bank's next meeting on June 22. Inflation is showing a steady downward trend in the UK since its peak in October 2022.

Earlier this month, the European Commission announced that average inflation for May in the Eurozone dropped to 6.1%: its lowest in more than a year. However, the inflation rate varied significantly among EU member states: Germany experienced 6.3% inflation in May, while Spain managed to maintain a rate of 2.9%, largely due to a government initiative to subsidize gas bills.

The European Central Bank said in May that "the inflation outlook continues to be too high for too long," as it raised interest rates to 3.25%. A poll of economists published by Reuters last week has a majority of experts expecting a new hike in June and another one in July, followed by rates remaining flat through the rest of the year.

Last week, Christine Lagarde, the European Central Bank President, said she sees “signs of moderation” in core inflation but doubled down on her stance that it's still too early to confirm that inflation has peaked.

In Canada, the last data for inflation puts April's rate at an annual 4.4%. This was the country's first move upwards after six monthly drops of its CPI. This slight tick higher from 4.3% inflation in March pushed the Bank of Canada to release the brakes on its pause last week, after a hold that had been in place since January. Canada's interest rates were taken to a 22-year high of 4.75% last Wednesday.

Canada’s current approach might be indicative of a trend that U.S. monetary policymakers could follow. They may opt to momentarily suspend rate hikes to better understand the impact of the prevailing federal funds rate. However, they could promptly reinstate the increases should the trend of inflation begin to rise again.

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