Fed to pause hikes but damage to US economy already done

(Alliance News) - The Federal Reserve calling time on its hiking cycle may come for the US economy to avoid "disarray".

There is "too much damage is already flowing through the system", according to Clifford Bennett, an analyst at New South Wales, Australia-based trading platform provider ACY Securities.

The market is expecting another 25 basis point hike, bring the target rate to 5.00% to 5.25%. The US central bank is then expected to halt its rate hiking cycle.

The Fed announces its latest decision at 1900 BST, with a press conference with Chair Jerome Powell following half an hour later.

A possible US debt default, banking failures and even commercial property concerns are among the wall of worry for the world's largest economy, Bennett explained. First Republic Bank was bought out by JP Morgan Chase & Co on Monday.

"An attitude of money printing carte blanche pervades Washington. Which is why the USA may actually default on its debt. The risks are growing despite the Democrats' attempts to find a way around the debate in the form of a technical administrative process. Even this effort to keep government running may not get past the post. The fact the administration is seeking means to go around the debate, instead of negotiating, just goes to show how desperately far apart the two parties both are," the analyst said.

"All this is happening as manufacturing dives ever deeper into contraction. Property prices are falling. There is risk of a commercial property meltdown later this year, and even Blackstone may be defaulting on a group of 11 prestigious apartment buildings in New York. The banking crisis just had a quantum shift in the wrong direction. Another two large regional banks may now be teetering. There are many more we do not know about, yet."

US President Biden, the Republicans and the US economy are on a disastrous collision course after the White House made clear it will not negotiate over extending the nation's debt limit.

Treasury Secretary Janet Yellen warned that the government will run out of money and default on its debts as soon as June 1, if there is no authorization for more borrowing.

That would mean inability to pay for everything from social programmes to the military and – in a cataclysmic blow to world financial markets – the national debt.

Before the interest rate decision, US economic data will be in focus on Fed day. The latest ADP jobs report, a precursor to Friday's non-farms, is reported at 1315 BST. A pair of purchasing managers' index readings follow from 1445 BST.

The US economy is expected to have added 148,000 jobs last month, according to consensus cited by FXStreet, up from 145,000 in March.

Zaye Capital Markets analyst Naeem Aslam commented: "Now, we know that some weakness has started to creep into the US labour market—the part of the US economy that has so far shown strong resilience. Today, traders are expecting a continuation of this trend, and they believe that the data set is going to print a weak economic number.

"The forecast for the data is slightly better than the previous; the previous was 145,000, while the forecast is for 148,000 - but we believe that the actual reading could be near 130,000 as the main message that has come to light during this earnings season is further layoffs from US corporations. Having said this, if the economic data does continue to beat the pessimistic forecast, this would give the Fed more ammunition to continue to increase the interest rate without any major worry."

By Eric Cunha, Alliance News news editor

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