US Fed likely to hike rates again as banking fears resurface

The US Federal Reserve is widely expected to raise its benchmark lending rate for a 10th -- and possibly final -- time on Wednesday, as it aims to bring down inflation while preventing fresh banking concerns from spreading.

The Fed resumed its two-day meeting Wednesday morning, and will publish its interest rate decision in the afternoon.

The US central bank began its aggressive campaign of interest-rate hikes in March last year, and has since raised rates nine times in a row to help target inflation stuck stubbornly high above its long-term target of two percent.

"Getting inflation back down to two percent has a long way to go and is likely to be bumpy," Fed Chair Jerome Powell said during a press conference after the March rate decision.

With the Federal Open Market Committee (FOMC) widely expected to raise its base rate by a quarter-point on Wednesday, analysts and traders are instead keeping a keen eye out for any change to the Fed's forward guidance.

Some analysts, including Goldman Sachs chief US economist David Mericle, predict the Fed will signal a pause in hikes from June onward, while Deutsche Bank economists see the Fed maintaining a "tightening bias" due to "stubbornly elevated" inflation.

Banking woes resurface

After a relatively calm period for banks following crisis-level worry in March, this week saw the reemergence of some turbulence with the collapse of California-based lender First Republic.

The commercial bank's failure, the second-largest in US history, was announced early Monday along with a sale to JPMorgan Chase, with regulators hoping that fears would finally be calmed.

But regional banks came under renewed pressure Tuesday, with some share prices declining by as much as 25 percent on concerns about the impact of interest-rate hikes on their financial health.

Despite Tuesday's turbulence, futures traders still see a greater-than 80 percent chance the Fed will stick to its guns and hike rates by a quarter-point, bringing its benchmark lending rate to between 5 and 5.25 percent.

Heading for recession?

US economic data remains mixed but is showing some signs of softening, with growth slowing to an annualized rate of 1.1 percent in the first quarter.

Some analysts believe this will provide the Fed with the justification it needs to come out with more mild forward guidance after Wednesday's decision.

"We expect Chair Powell today to emphasize that the Fed is now data-dependent, and that nothing is guaranteed," Pantheon Macroeconomics economists wrote in a note to clients after markets closed Tuesday.

The data on inflation paints a picture of slowing price increases in some areas and ongoing stubbornness in others, while figures on employment point to a weakening job market as the economy slows.

"By the time of the June meeting, we believe softness in the data and ongoing worries about the impact of constrained bank credit will probably be enough to deter further hikes," Goldman Sachs economists wrote in a recent note.

Minutes published from the March FOMC meeting showed that the Fed predicted the US will enter a mild recession later this year.

The extent of the recession could depend on how much further the Fed decides to raise interest rates, KPMG senior economist Kenneth Kim wrote in a recent note.

"Any further rate hikes beyond May risk a deeper recession than the mild downturn we currently foresee," he said.

Tighter credit conditions

Fed officials have in recent weeks suggested that the tighter lending conditions after Silicon Valley Bank's dramatic collapse in March could act like an additional rate hike and help bring down inflation.

"A significant tightening of credit conditions could obviate the need for some additional monetary policy tightening," Fed governor Christopher Waller said last month.

But he cautioned against "making such a judgment" before good data is published on the effect of the financial turmoil and bank lending.

That data could come as early as next Monday when the Fed releases its quarterly review of banking lending practices.

FOMC members already have access to the report during their deliberations this week, adding to the intrigue among analysts and traders into the Fed's future interest-rate guidance on Wednesday.

"If the Fed intends to pause in June, it will likely use the post-meeting statement to guide market expectations," Oxford Economics' chief US economist Ryan Sweet wrote in a recent note.