Fed holds off on interest rate hikes but hints at further increases

Fed holds off on interest rate hikes but hints at further increases

Federal Reserve officials left interest rates unchanged on Wednesday, marking the 10th consecutive rate hike since March 2022. Still, policymakers predicted they may need to raise rates twice more this year as inflation, while moderate, remains stubborn.

Fed officials, in their policy statement, said they were giving themselves time to assess how the economy was reacting to a rapid campaign to control slowing demand and wrestling rapid inflation. The central bank had already raised rates from 5 to 5.25 per cent in a little over a year.

But policymakers have also predicted in their economic forecasts that they could raise interest rates even further – up to 5.6 percent – ​​by the end of 2023. Two more quarter-point rate hikes will follow during the Fed’s four remaining meetings this year. The estimates sent a clear signal that Fed officials are concerned about the staying power of inflation and will need to do more to calm growth and bring price increases under control.

“The process of reducing inflation is going to be gradual — it’s going to take some time,” Fed Chairman Jerome H. Powell said at a news conference after the decision. But, given how many rates have already risen, he also said it is “appropriate to move at a more moderate pace.”

Fed officials are moving into a new, more patient phase of their war against inflation, which is set to intensify in 2021. Its pressure to reduce the price increases.

The rate moves already made by the Fed are still ongoing and weighing on the economy. And the prospect of even higher borrowing costs could keep lenders and consumers cautious, helping slow economic growth.

“The Fed is trying to have their cake and eat it,” said Gennady Goldberg, rate strategist at TD Securities. , “The problem is: can they convince the markets?”

Stocks fell sharply after the release of the Fed’s policy statement and economic projections, but recovered during Mr. Powell’s news conference, as he stressed that the forecasts are estimates and not a promise of future rate changes.

Investors expect another rate hike this year, most likely when the Fed meets again on July 25 and 26 — but less than Fed policymakers predicted.

When Fed officials raise interest rates, it makes mortgage and business loans more expensive. This causes consumers and firms to pull back and, in theory, should force companies to stop raising prices.

But 15 months into the Fed’s pressure to slow growth and inflation, the economy is proving surprisingly resilient. Consumer spending has slowed, but it hasn’t tanked. Salary benefits are a bit more moderate, but companies are still hiring.

And as the economy continues to grow, inflation tends to stick around. Overall price growth has slowed significantly as fuel costs eased and growth in grocery prices moderated. But inflation remains very bullish after separating those two volatile products. Decline in that “core” measure has been pretty much stalled.

“You are not seeing a lot of progress,” Mr. Powell said on Wednesday. “We want to see it go down decisively.”

The Fed’s economic projections come out every three months, its first since March – and they reflect growing inflation concerns. The latest forecasts suggested that 2023 could end with inflation at 3.9 per cent after stripping out food and fuel prices. The projection was much higher than the 3.6 percent officials forecast in March.

That inflation measure stood at 4.4 percent in April. A related and more up-to-date inflation gauge – the consumer price index – prevailed this week that while overall inflation was coming down, the core measure remained very sticky.

Consumer price increases were back to 4 percent after rising nearly 9 percent last summer, but they remained very sharp on a core basis, at 5.3 percent,

Still, the Fed is trying to strike a delicate balance.

Officials have been adamant that they need to bring hot inflation under control in a time-bound manner, even if it is at the cost of the labor market. Mr. Powell stressed on Wednesday that the economy as a whole can only stabilize when inflation comes down.

And doing too little can come at a real cost. If policymakers fail to bring inflation under control in a timely manner, consumers and businesses may expect persistently higher prices and adjust their behavior accordingly: workers may demand larger annual wage increases, companies raise prices more regularly, and it may be harder to stamp out price increases in general.

But central bankers also want to avoid raising rates too high and unnecessarily plunging the economy into recession. Doing so would cost Americans their jobs and weaken financial security for families in the economy.

So central bankers are moving more slowly. Lowering rates cautiously can give officials a chance to take more data into account before making a decision – helping to avoid overdoing the adjustment without throwing up white flags.

“We have covered a lot, and the full impact of our crackdown has yet to be felt,” Mr. Powell said. He said no decision had been made on the timing of future rate hikes, but added that July would be a “live” meeting — meaning officials could raise rates.

The question is whether the economy can survive a recession with rates so high and poised to climb further. Fed officials still think there’s a path to tame inflation without a painful recession that costs a lot of workers their jobs — even if it’s a narrow one.

“It is possible – a strong labor market in a way that gradually helps,” Mr. Powell said. But he also stressed that the primary focus now is on getting inflation under control.

“We understand that allowing inflation to creep into the American economy is something that we cannot allow to happen,” Mr. Powell said, adding that the consequences of inflation will matter for “generations” of Americans and that the Fed has “highest priority”. ,

Joe Rennison contributed reporting.

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