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What Will Be the FED's Interest Rate Decision and Its Effects on Wednesday? WSJ Analysts Evaluated!

WSJ analysts evaluated the situation before the highly anticipated US interest rate decision on Wednesday.

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Fed officials are on their way to re-raising interest rates at their meeting this week, assessing whether this will be enough to halt the fastest rate hike cycle in 40 years.

"We are much closer to the end of the tightening journey than to the beginning," Cleveland Fed Chair Loretta Mester said on April 20.

FED is expected to increase by 25 basis points

In case of another quarter-point increase, the benchmark federal funds rate will rise to the highest level in the last 16 years. In March 2022, the FED started raising interest rates from a level close to zero.

Earlier today, First Republic Bank was announced by the Federal Deposit Insurance Corporation (FDIC) as JPMorgan Chase & Co. company, was the latest indicator of how banking stress overshadowed the economic outlook.

While analysts believe Monday's deal will further resolve potential banking problems, officials may have to reconsider the planned increase should serious and unexpected financial stresses arise before the meeting.

According to the Wall Street Journal, in projections released after the March meeting, the majority of Fed officials thought the central bank needed to raise interest rates by one final quarter point before retreating to its corner. These officials may conclude after this week's meeting that they have reached a sufficiently restrictive environment.

Ray Farris, chief economist at Credit Suisse, said that while many economists are focused on a potential recession, the bigger concern for the Fed remains a very fast-growing economy. "Secretly, they don't care about real economic weakness," Farris said.

Analysts said they thought it would be of little use if the FED firmly rejected or signaled a possible rate hike in June. The Fed's policy statements since the beginning of last year carry the element of promising rate hikes at every subsequent meeting, using language sometimes called forward guidance.

"What investors have been doing since October is taking everything good news and overreacting to it," said Vincent Reinhart, chief economist at Dreyfus and Mellon.

“If the Fed's statements are "too dovish, market participants take it, go over it and go too far."

Reinhart, who advised Fed officials on how to manage rate hikes in 2006, thinks officials will refrain from signaling a rate hike in June:

“One more time to promise to tighten but fail to deliver would be a greater incentive for markets to rally.”

*Not investment advice.

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