The Federal Reserve is expected to stop raising interest rates for the first time in 11 policy meetings on Wednesday. But investors are betting that the stagnation will not last.
The pattern of increasing stopping and resuming rates is becoming well established around the world. Reserve Bank of Australia stopped my campaign Earlier this year only to raise rates twice again, including last week. Bank of Canada did not change rates for four months before picking them up again In a surprise move on June 7.
This is because inflation is stubborn. Stamping it out has been difficult in a variety of economies, from Melbourne to Munich and Miami. Many central banks are struggling with price increases that are only slowly coming down, supported by higher service costs, which include things like concert tickets, fares and hotel rooms.
“Everyone has a similar problem,” said William English, a former Fed staff member now at Yale University, noting that policymakers in Britain and the eurozone are facing inflation problems that Has a lot in common with the Fed. European Central Bank policymakers also meet this week, and are expected to continue raising rates.
The coming months could be hard to predict as officials try to decide whether to keep interest rates high enough to ensure their economy slows enough to prevent price rises.
“We’re at a stage where we’re groping a bit,” said Mr. English. “It’s going to be a period of great uncertainty.”
The Fed has already raised rates sharply over the past 15 months, above 5 percent in May, and those higher interest rates are coursing through the economy.
In recent speeches, Fed officials have indicated they may soon “skip” a rate hike to give themselves time to assess the effects of their changes, and investors betting That Fed officials will hold policy steady at their meeting on Tuesday and Wednesday before raising rates one more time in July. But those forecasts are uncertain: Traders usually have a clear idea of what the Fed might do at its meetings, but this time markets see a small but real chance that the US central banker will raise rates this week.
The skepticism is partly due to the fact that the Fed will receive a key inflation reading, the Consumer Price Index, on Tuesday. But it also shows what a frightening time it is for economic policy in the United States and around the world.
This is the worst inflation episode the US and many of its peer economies have seen since the 1970s and 1980s, so the world’s policymakers have been grappling with the issue for a long time. And while inflation is coming down, it has also demonstrated staying power.
In the United States and elsewhere, inflation began in goods such as cars and furniture, but moved to services such as airfares, education, and haircuts. This is of concern because price increases for services are driven by macroeconomic trends rather than one-off supply problems, and may become more permanent.
“Service price inflation is proving persistent here and abroad,” said Reserve Bank of Australia Governor Philip Lowe. in a speech Explaining the surprise move of the central bank last week.
Fed officials are concerned that today’s rate hike may prove difficult.
salary benefits remain fairly bullish, which could limit how quickly prices fall as employers try to cover rising labor bills. And while slowing rent growth should cool overall inflation, some economists have questioned whether this will be enough to sustain inflation.
Fed Governor Christopher Waller, who often favors higher interest rates, said, “A rebound in the housing market is raising questions about how low rents will hold up.” a recent speech,
At the same time, central bankers want to avoid plunging the economy into a recession that is more painful than necessary.
This is the reason why there could be a Fed pause this week. Officials know that it takes months or years for monetary policy to show its full effect. And the recent bank turmoil could further slow lending and spending, a situation officials are still monitoring.
“The strange thing is that it’s actually not that bad — but we also don’t have enough survey data,” said Yelena Shulyatyeva, senior US economist at BNP Paribas. For more proof, she must be looking Dallas Fed Bank Survey this month.
Still, after raising rates in Australia and Canada last week, investors asked: could this mean the Fed will be even more hawkish than expected?
“It is a mistake to make a simplistic comparison,” said Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI. While the rate hike overseas underscores that inflation is proving to be stable globally, he said, this is not surprising.
“We know that inflation has been disappointingly slow to come down,” he said.