[1/2] The Federal Reserve building is pictured on March 19, 2019 in Washington, United States. Portal/Leah Millis/File Photo
WASHINGTON, Jun 14 (Portal) – The Federal Reserve is expected to leave interest rates unchanged on Wednesday for the first time since the US Federal Reserve launched a historically aggressive round of monetary tightening in March 2022.
But don’t call it a pivot or a pause.
Policymakers may well conclude their two-day meeting by hinting that more rate hikes are on the way once they take time to assess how the economy is performing, whether the financial system is resilient and whether inflation continues to fall.
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“We probably need a bit more tightening, but it’s not clear by how much,” said Blerina Uruci, chief US fixed income economist at T. Rowe Price Associates, noting that despite the strength of recent employment – and core inflation reports a A ‘differentiated’ reading of the data showed that both may be weakening.
“When there is so much uncertainty, it makes sense to proceed cautiously,” she said.
The Fed is expected to release its policy statement and new quarterly economic forecasts at 2:00 p.m. EDT (1800 GMT). Fed Chair Jerome Powell will hold a press conference half an hour later.
Doubt about the economy, rivaled by ongoing inflation concerns, has led the Fed to this point, which is on the cusp of what analysts are calling “hawkish leapfrogging.”
While the Fed is likely to refrain from raising borrowing costs after 10 straight hikes that have pushed the federal funds rate down to the current range of 5.00% to 5.25%, Fed policymakers are expected to They show, both in their language and in their forecasts, that one or two more quarter-point increases may be needed by the end of 2023.
POLITICAL COMPROMISE
Data since the last Fed meeting in early May has left policymakers with a number of difficult signals and plenty of room for debate.
The economy continues to deliver strong monthly gains in jobs and wages, and one of the Federal Reserve’s more closely watched metrics – the ratio of job vacancies to the number of unemployed – has risen recently, a sign that the job market is still not coincides with the demand for labor and the available.
Inflation is declining only slowly and is proving to be longer than expected in some aspects. The closely-watched personal consumption spending index (excluding groceries and energy) has not improved much this year, rising at an annual rate of 4.7% in April, more than double the Fed’s 2% target.
However, some forward-looking price measures suggest that inflation may fall sharply in the coming months; the unemployment rate rose sharply from 3.4% to 3.7% in May; and the annual growth rate of bank lending is slipping towards zero, part of a credit slowdown the Fed is watching closely for signs of stress in the financial industry.
The expected policy outcome reflects a compromise born of some uncertainty about what it all means. Fed officials, fearing the economy could weaken quickly, are being given at least a six-week hiatus until the July 25-26 meeting, and fears remain high on inflationary readings as we know the central bank will remain poised to raise interest rates if price pressures persist.
The decision doesn’t mean that there will be an extended pause in rate hikes, or — a point Powell is likely to emphasize — that rate cuts are on the horizon anytime soon.
The Fed’s most recent quarterly forecasts assumed that the federal funds rate would not fall until late 2024 as inflation also eased – moves that keep the inflation-adjusted interest rate roughly the same. A real ‘pivot’ towards looser policy was not seen until 2025, when policy rates were expected to fall more than inflation by the end of the year.
Reporting by Howard Schneider; Edited by Paul Simao
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Howard Schneider