The Federal Reserve is set to hold its benchmark interest rate steady for the first time in more than a year following 10 consecutive increases even as it holds out the prospect of further rises later this year.
At the end of its two-day gathering on Wednesday, the Federal Open Market Committee is expected to forgo a quarter-point rate rise and keep the federal funds rate at the current target range between 5 per cent and 5.25 per cent.
A pause would mark the first reprieve in the US central bank’s aggressive monetary tightening campaign since it first started raising rates in March 2022, ushering in a new phase in its battle against stubbornly-high inflation.
The Fed will also release an updated “dot plot” that collates officials’ forecasts for the fed funds rate until the end of 2025, which is expected to signal support for at least one more quarter-point increase this year.
Another increase of that magnitude would lift the benchmark rate to a new range of between 5.25 per cent and 5.5 per cent. The Fed could implement an additional rate rise as early as next month, when its policy setting committee is scheduled to meet again. For that reason, economists say holding rates steady on Wednesday could amount to more of a “skip” than a “pause”.
In March, when the dot plot was last updated, most policymakers projected the central bank would not raise rates beyond the current level, in large part because of banking stress following the failure of Silicon Valley Bank and other lenders.
The Fed is facing the tricky task of determining how much more to squeeze the economy amid uncertainty about the degree to which a credit crunch will weigh on growth and hiring. Officials are also assessing the cumulative effect of their monetary tightening given that rate rises take time to be fully felt in the real economy.
Jay Powell, the Fed chair, said last month that the central bank could afford to look at the data and make “careful assessments” in terms of the path forward for policy.
Since then, the economic picture has been mixed and has stoked an intense debate among officials over if and when more rate rises will be needed. Economists polled by the Financial Times last week believed the central bank would raise rates at least two more times this year to between 5.5 per cent and 6 per cent.
The latest consumer price index report, released on Tuesday, showed a deceleration in annual inflation despite persistent price pressures across many segments of the economy. The labour market has lost some momentum but remains very strong, encouraging consumers to keep spending.
Fresh inflation, growth and unemployment estimates are also due to be released by the Fed on Wednesday. In March, most officials thought “core” inflation, based on the personal consumption expenditures price index, would decline to 3.6 per cent this year before slowing further to 2.6 per cent in 2024. It currently hovers at 4.7 per cent.
In March, policymakers estimated economic growth of just 0.4 per cent in 2023 before a rebound in 2024 as the unemployment rate peaked at 4.6 per cent. Fed staffers have adopted a more downbeat view, however, forecasting a “mild” recession this year.
Source: Economy - ft.com
