The US Federal Reserve is set to lift its benchmark rate by a quarter of a percentage point on Wednesday, marking a shift to slower, more conventional interest rate rises as inflation falls.
The Federal Open Market Committee is expected to raise the federal funds rate to a new target range of between 4.5 per cent and 4.75 per cent, the highest level since September 2007.
A quarter-point increase would be a break with the unusually large half and three-quarter-point rate rises the Fed relied on in 2022 as it wrestled with persistent price pressures.
The Bank of England and the European Central Bank are due to implement their own interest rate increases on Thursday, with both expected to opt for half-point adjustments.
Fed officials have said slower tightening will give them more time to assess the impact of their actions on the economy as well as greater flexibility to adjust course if necessary.
The Fed is still expected to signal it will continue its campaign to raise rates, amid lingering concerns it has not fully curbed inflation.
The Fed’s statement, due to be released alongside the rate announcement at 2pm Eastern Time on Wednesday, will be closely parsed alongside chair Jay Powell’s press conference, which begins at 2.30pm Eastern Time, for signals on how much more tightening the central bank plans to do.
Since the central bank started raising rates last March, its statement has consistently noted that the FOMC expects that “ongoing increases in the target range will be appropriate”. Changes to that wording may be taken by Wall Street that the Fed is closer to the end of its rates-rising campaign than previously thought.
Alternatively, the Fed may choose to note that it expects to keep its policy rate at a restrictive level “for some time”, in a bid to emphasise it does not plan to cut rates in the near future.
In December, most officials projected the fed funds rate would peak at between 5 per cent and 5.25 per cent this year and for that level to be maintained throughout 2023. Many have continued to push that message ahead of this week’s meeting, even as the Fed’s actions begin to have a more noticeable effect.
Price pressures broadly appear to have peaked, while consumers are spending less and companies have begun to cut costs. However, wage growth remains high and the labour market has not yet softened to the degree officials say is necessary to bring inflation down to the Fed’s 2 per cent target.
If the path Fed officials set out in December still holds, it suggests the central bank will implement two more quarter-point rate rises beyond Wednesday’s increase.
But policymakers have been unable to convince money managers and traders in fed funds futures markets. Financial markets continue to assume that rates will peak short of 5 per cent and that Fed will subsequently cut them by half a percentage point before the end of the year.
In tandem, US mortgage rates have slid from their peaks, stocks have rallied and corporate borrowing costs have fallen. That has set the stage for what Tobias Adrian, the IMF’s head of monetary and capital markets, warned could be a shock if the inflation data disappoints in the future and the Fed tightens further as a result.
Source: Economy - ft.com
