Its chairman, Jerome Powell, has been saying for months that bringing US inflation back to its 2% target will be a long and difficult but necessary effort because long-term inflation would have even more damaging consequences for the economy.

It is therefore unlikely that the Fed's monetary committee (FOMC) will consider pausing now in its march forward.

Widely anticipated, a moderate increase of a quarter of a percentage point, or 25 basis points, is the assumption widely accepted among market participants, according to CME Group's assessment.

If the idea of a pause prevailed at the end of March, expectations of an increase of this magnitude have been widely envisaged since the beginning of April.

Nevertheless, the situation has changed significantly in recent weeks. While it was still resisting, the US economy is multiplying signs of running out of steam, long awaited and finally visible.

Last week, first-quarter growth came in at 0.3% compared to the last three months of 2022 and at just 1.1% annualized. And the probability of a recession, sharper than initially expected, is widely anticipated by the markets.

"Our data suggest that monetary tightening and recent tensions in the banking system will lead to a mild recession, stronger than we had anticipated so far," Oxford Economics chief economist Ryan Sweet told AFP.

Moreover, the fragility of some banking institutions has returned to the forefront with the fall of the regional bank First Republic, finally bought over the weekend by JPMorgan Chase, the number one in the sector.

"Fear is back"

Concern about the strength of these medium-sized banks remains strong, with several of them seeing their shares fall on Tuesday on Wall Street, like PacWest Bancorp (-27.78%) or Western Alliance (-15.12%).

"Fear was back for the banking industry," said Adam Sarhan of 50 Park Investments. "Fear is a very powerful feeling on Wall Street. When he enters through the door, logic comes out the window," he added.

"The Fed needs to look at 'these banking woes' as a game-changing event," said Karl Haeling of LBBW, and no longer see banks as bearing the brunt of "isolated cases of mismanagement."

The key rate of the Fed © Patricio ARANA / AFP

Because these banks suffer in particular from the rise in rates, which set the cost of the money that institutions lend to each other on a day-to-day basis. It has gone in just over a year from a range between 0 and 0.25% to values between 4.75 and 5% now.

The Fed will announce its decision in a press release at 14:00 (18:00 GMT) and then the president of the institution, Jerome Powell, will hold a press conference at 14:30 (18:30 GMT).

Stricter credit conditions for households and businesses, "risk slowing activity and hiring," warned the president of the Fed's regional office in Philadelphia, Patrick Harker, on April 20. They can have the same effect as rate hikes, slowing demand and therefore price increases, Jerome Powell also said at his last press conference.

After this new hike, economists will focus mainly on the language of the statement, to know "if the reference to + additional firming + is changed," said Art Hogan of B. Riley Wealth Management.

Many in the markets hope that the Fed will declare a pause in observation or at least display a less strict communication on the monetary front.

However, while inflation fell sharply in March, core inflation (excluding food and energy prices) barely slowed and is now higher than inflation itself.

© 2023 AFP