The Federal Reserve is expected to raise its benchmark interest rate by a quarter of a percentage point on Wednesday as it wrestles with how much more monetary tightening will be needed to bring US inflation under control.
The Federal Open Market Committee is expected to lift the federal funds rate to a new target range of between 5.25 per cent and 5.5 per cent, resuming its most aggressive campaign of monetary tightening in decades.
An increase on Wednesday would come after a brief reprieve at the previous gathering in June. At the time, Fed chair Jay Powell indicated the central bank would take a more gradual approach to rate rises to account for months of earlier monetary tightening and the fallout of a banking crisis this year.
The Fed will release its latest rate decision at 2pm Eastern Time.
Having raised its benchmark rate from near zero in March 2022 to more than 5 per cent, the Fed is now close to a level of borrowing costs it deems “sufficiently restrictive” to bring inflation down to its longstanding 2 per cent target in a timely manner.
Powell last month said the Fed was “not so far away from the destination”. But officials have so far resisted ruling out any further rate increases in case inflation — which fell to an annual rate of 3 per cent in June, according to the consumer price index — does not keep falling this year.
One complication for the central bank is that the US economy has defied expectations of a sharper slowdown this year. The labour market has cooled off but remains strong, helping to buoy consumer spending. Headline inflation has fallen as energy and food prices have eased, although “core” measures that strip out those volatile costs still hover well above the Fed’s target.
Concerns that some prices — such as those for services — were still rising more quickly than expected prompted officials last month to revise up their forecasts for core inflation, as measured by the personal consumption expenditures price index, and in turn their predictions for the level at which the fed funds rate would peak this year.
In June, most officials saw the benchmark rate topping out between 5.5 per cent and 5.75 per cent, suggesting one further quarter-point increase after a July move.
However, market participants and economists are sceptical the Fed will follow through with further rate rises this year.
After the July gathering, the Fed next meets in September, giving it two more full rounds of monthly data on jobs, inflation and consumer spending.
Christopher Waller, a governor and one of the FOMC’s most hawkish members, recently said the September gathering would be a “live meeting”, meaning the Fed could raise rates then.
But many economists believe the Fed has a high bar for more tightening in September. Should data indicate the need for another rate rise, most expect it to be implemented at the November meeting.
Source: Economy - ft.com
