What to Watch for as the Federal Reserve Meets This Week

Federal Reserve officials are widely expected to leave interest rates steady at the conclusion of their two-day meeting on Wednesday. But investors and economists will watch for any hint about whether rates are likely to stay that way — or whether central bankers still think they might need to increase them again in the coming months.

Officials will release a statement announcing their policy decision at 2 p.m., followed by a news conference with Jerome H. Powell, the Fed chair, at 2:30 p.m. Both will offer policymakers a chance to signal what they think might come next for interest rates and the economy.

Central bankers have already raised interest rates to a range of 5.25 to 5.5 percent in a push to tame inflation. That rate setting is up from near-zero as recently as early 2022, and is the highest level in 22 years.

Higher borrowing costs are meant to make it more expensive to buy a home, purchase a car or expand a business using a loan. By tapping the brakes on demand and hiring, that slows the broader economy, which can help to put a lid on price increases.

Fed officials have widely signaled that they are close to the point where they no longer need to raise interest rates — simply leaving them around this level will cool the economy and help drive inflation back down to their 2 percent goal over time. The question now is twofold: Will policymakers feel it necessary to make one more quarter-point interest-rate move later this year or early next? And once they decide that rates are high enough, how long will they leave them elevated?

Here’s what to watch for on Wednesday.

The Fed’s language will be in focus.

Central bankers will first release their standard monetary policy statement, and markets will carefully watch to see if officials make any changes that suggest they are done raising interest rates.

Last time, officials said that “in determining the extent of additional policy firming that may be appropriate,” they would contemplate incoming economic data. If they softened that language to make further policy moves sound less likely, it would be notable.

But investors may not find much else to parse in this release. Fed officials will not release fresh quarterly economic projections again until December. Given that, traders will have to watch Mr. Powell’s news conference for more details about what comes next.

Recent market moves could be critical.

As of the Fed’s latest economic forecasts in September, officials still thought that one more rate increase in 2023 might be appropriate.

But something critical has changed in the intervening weeks.

Long-term interest rates have climbed notably in markets since the Fed gathered on Sept. 19-20. While central bankers directly set short-term interest rates, longer-term borrowing costs often adjust only at a delay — and the recent jump is making everything from mortgages to business loans much more expensive.

That could help slow the economy, doing some of the Fed’s work for it. And some economists think in light of that, central bankers will no longer see a need for another rate increase.

Mr. Powell, during a question-and-answer session on Oct. 19, said that “at the margin” the recent tightening in financial conditions could reduce the need for further tightening, “though that remains to be seen.”

“I took it to mean that perhaps there isn’t as much urgency to raise interest rates further,” said Blerina Uruci, chief U.S. economist at T. Rowe Price. She said that she didn’t expect officials to rule out another move, but “they need to manage a broad range of risks right now.”

Strong consumer spending may keep officials alert.

While the Fed is dealing with the possibility that higher market-based interest rates will weigh on the economy, they are also confronting another potential challenge: Economic data have remained surprisingly strong in recent months.

On one level, this is good news. Consumers are shopping and companies are hiring at a rapid clip in spite of higher interest rates, and that resilience has come at a time when inflation has moderated substantially. The Fed’s favorite inflation gauge has slowed to 3.4 percent, down from 7.1 percent at its peak in summer 2022.

But if consumer spending remains so strong that companies feel they can raise prices without scaring away customers, that could make it tough to fully wrestle inflation back down to 2 percent.

That’s why policymakers at the Fed are watching the continued strength closely — and trying to decide whether it suggests that further interest rate increases are needed.

Timing is a big question.

Officials may decide that they simply need more time to watch economic trends play out.

Holding off on further rate moves in November — and possibly beyond — could give officials a chance to see if growth and consumer spending slow in the way companies have been warning they could.

Plus, keeping rates on pause will give officials more time to see how looming geopolitical risks shape up. The war between Israel and Hamas could affect the economy in hard-to-predict ways. If it escalates into a regional war, it could shake consumer confidence. But a wider conflict could also cause oil prices to pop, pushing up inflation.

At the same time, officials won’t want to fully rule out a future move at a time when market rates could fall, risks could fade and growth could remain quick.

“Maintaining optionality makes a lot of sense in the current context,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank.

Wall Street is divided over what will come next. Investors see about a one-in-four chance of a rate move at the Fed’s final 2023 meeting, which takes place on Dec. 13. They see a slightly higher — but far from guaranteed — chance of a move in early 2024.

“Nobody is feeling a high degree of confidence about the economic outlook right now,” Ms. Uruci said.