What to Watch at the Federal Reserve’s July Meeting

The Federal Reserve is widely expected to raise interest rates at its meeting on Wednesday, and economists will be watching for hints at what officials expect next — and how they think the central bank’s fight against rapid inflation is going.

Fed officials will release their decision at 2 p.m., after which Jerome H. Powell, the Fed chair, will hold a news conference.

Policymakers are expected to raise rates to a range of 5.25 to 5.5 percent this week, their 11th move since they began to lift borrowing costs in March 2022. Officials ratcheted rates higher rapidly last year but have been slowing their campaign for months, even skipping an adjustment in June after 10 consecutive moves.

The central question now is: When will they stop?

Central bankers are unlikely to make a clear commitment this week. They have projected one additional rate move this year, to a 5.5 to 5.75 percent range, but officials will not yet need to commit to when — or even whether — that move is happening. Fed officials will have plenty of time, and plenty of data to parse, before they release their next rate decision and a fresh set of quarterly economic projections on Sept. 20. Still, investors and Fed watchers in general will be monitoring a few key developments on Wednesday.

The Fed statement may not change much.

Many economists expect the Fed to leave their post-meeting statement, which they use to announce their interest rates stance, mostly unchanged at this meeting.

The Fed statement said last month that “in determining the extent of additional policy firming that may be appropriate,” officials would consider how much they had already raised rates, how quickly that was working to slow the economy and how both economic data and the financial system were holding up.

Both jobs numbers and inflation figures have softened somewhat since the Fed’s June meeting, prompting investors and some economists to mark down the chances of another rate increase this year. But Fed officials will probably avoid signaling that they are backing away from the possibility of raising interest rates further.

“They don’t want markets to get ahead of themselves and think it’s over,” said Yelena Shulyatyeva at BNP Paribas. “Our forecast is July and done, but if inflation re-accelerates, they’ll keep on going.”

The news conference will be all about tone.

If the statement is as plain vanilla as expected, it will put all eyes on Mr. Powell’s news conference. The Fed chair has so far been careful to send two big signals: Rates may need to rise further, and they will almost certainly stay high for some time.

“Although policy is restrictive, it may not be restrictive enough, and it has not been restrictive for long enough,” Mr. Powell said on June 28.

The Fed might be feeling a little bit better about inflation after the Consumer Price Index report for June came in softer than expected, with an encouraging slowdown in a few closely watched service categories. The overall inflation number stood at just 3 percent, down from 9.1 percent at its peak last summer. (Fed officials aim for 2 percent inflation using a separate but related inflation measure called the Personal Consumption Expenditures price index, which is set for release on Friday.)

But that good news is just one month of data.

Wall Street economists forecast that inflation will continue to slowdown, but wild cards abound: Gas prices popped at the pump this week after a shutdown at an Exxon Mobil refinery, and the peak of hurricane season still lays ahead. Market-based wheat prices have climbed this month after Russia pulled out of an agreement guaranteeing safe passage for ships carrying grains across the Black Sea, which could eventually trickle through to lift consumer costs.

Those may ultimately prove to be blips, but they underline that shocks could still push prices up. Nor are big surprises the only thing to worry about: Price increases could simply prove stubborn.

A lot of the slowdown in inflation so far has come from healing supply chains and a return to normal in categories heavily affected by the pandemic. The economy is slowing, which could lower price increases broadly over time, but job gains remain faster than before the pandemic and consumer spending still has momentum under the surface.

That’s why Mr. Powell has been striking a cautious tone to date.

“We’ve all seen inflation be — over and over again — shown to be more persistent and stronger than we expected,” Mr. Powell said at an event in Spain late last month.

Incoming data are key going forward.

The big question for Fed officials is whether they have done enough to feel confident that the economy will slow and inflation will return fully to their 2 percent goal. They will be looking toward a number of data releases over the coming weeks for the answer.

Policymakers will get a fresh reading on Friday of a wage measure they watch closely, the Employment Cost Index. That quarterly measure is not jerked around by shifts in the composition of the labor market the way that monthly wage data can be — making it a more reliable snapshot of pay trends — and it has yet to show a steady slowdown.

Officials usually cheer on quick pay gains, but they believe that with wages rising as quickly as they have recently, it would be hard to fully cool inflation. Companies that are paying more are likely to try to charge more to protect their profit margins. Policymakers will also closely watch two incoming employment reports, for July and August, and two more inflation reports slated for release before their next gathering.

Don’t expect the Fed to declare victory.

One thing you won’t hear on Wednesday? The Fed declaring victory in its quest to slow inflation. Economists think that the central bank’s odds of cooling the economy without causing a recession have gone up, but it is still far too early to say for sure.

If inflation threatens to stay too high, the Fed may still err on the side of overdoing it to make sure that it does not become more permanent, some have warned.

Alan Blinder, a Princeton economist and former vice chair of the Fed, has argued that soft landings — or at least “soft-ish” landings, in which recessions are mild — are more common than often believed.

Recent developments, Mr. Blinder said, are consistent with his view that a soft landing is possible — “I’m happy as a clam,” he said — but he said such an outcome is far from certain. He puts the probability of a recession around 40 percent. And he worries the Fed could stay too aggressive for too long, continuing to raise rates this fall despite the slowdown in inflation.

“I’m starting to get a little nervous about Fed overshoot, the classic impatience,” he said.

Ben Casselman contributed reporting.