Federal Reserve officials are expected to leave interest rates unchanged at their meeting on Wednesday, giving them more time to assess whether borrowing costs will be high enough to pressure the economy and keep inflation under control. Is.
But investors are likely to be less focused on what policymakers do on Wednesday — and more on what they say about the future. Wall Street will be watching closely to see whether Fed policymakers still expect another interest rate hike before the end of the year or whether they are rapidly approaching the next step in their fight against runaway inflation.
Central bankers have already raised interest rates from 5.25 to 5.5 percent, the highest level in 22 years. By making it more expensive to borrow money to buy a home or expand a business, they are trying to slow down demand throughout the economy, making it harder for companies to charge more without losing customers and slowing the rise in prices. Has been.
Officials predicted in their last quarterly economic forecast released in June that they were likely to make another rate hike before the end of 2023. They have kept that outlook alive throughout the summer, even as inflation has begun to ease meaningfully. But key policymakers have shown little intention of taking another step in recent weeks.
Fed officials will release economic projections after their meeting on Tuesday and Wednesday this week, which will take a fresh look at whether a majority of policymakers still think an eventual rate hike is likely to be necessary. The estimates will also reveal how officials are interpreting a confusing moment in the economy, when consumer spending has been stronger than many economists expected, while inflation has eased a little faster.
Overall, the revised forecast, the Fed’s statement and a press conference with Mr. Powell after the meeting could give a clear signal about how close the central bank is to the end of rate increases — and what the next step is in trying to get inflation down completely. It may sound like creaking.
“Over the last few weeks you may have seen a number of centrist Fed officials saying: We’re about where we need to be — we might as well be there,” said Michael Ferroli, JPMorgan’s chief U.S. economist.
Mr Ferroli thinks there is about a two-thirds chance that policymakers will predict yet another change in the rate, and a one-third chance that they will predict that the current setting is likely to be the peak interest rate.
But even though the Fed has signaled that interest rates have peaked, officials have made clear that they are likely to remain high for some time. Policymakers believe that keeping rates high will continue to impact economic growth and gradually cool the economy.
Mr Ferroli does not expect officials yet to start talking decisively about the next phase – in which rates will come down.
“They haven’t won the war on inflation, so it would be a little premature,” Mr. Ferroli said.
That said, economic forecasts can provide some clues. Fed officials will release their projections for interest rates in 2024, 2025 and – newly – 2026 after this meeting. In June, their 2024 projections suggested officials expected borrowing costs to fall four times lower next year. The question is when in the year these cuts will occur and what officials will need to see to feel comfortable lowering rates.
Policymakers may offer little clarity on those points on Wednesday in hopes of avoiding a big market reaction — which would make their job of cooling the economy more difficult.
If stocks surged as the market began to broadly anticipate that Fed-induced financial and economic stress was likely to come soon, it could make it cheaper and easier for companies and households to borrow money. This could speed up the economy while the Fed is trying to slow it down.
Already, the Fed’s stance on higher rates has been surprisingly resilient. Consumers and companies have continued to spend at a healthy clip despite a number of economic risks — including the resumption of federal student loan payments in early October and a potential government shutdown later this month.
Household savings left over from the pandemic, a strong labor market with solid wage growth, and various government policies designed to boost infrastructure and green energy investment could help maintain that momentum.
Economists at Goldman Sachs said that flexibility could prompt another revision to the Fed’s economic forecasts on Wednesday: Officials could mark down their estimate of the so-called neutral rate, which signals that interest rates will be lowered to put pressure on the economy. How high does it need to be kept? This suggests that although policy is reining in the economy today, it is not doing so as intensely as officials might have hoped.
The sustainability of the economy may also keep policymakers from getting too excited about the recent slowdown in inflation.
Growth in the consumer price index has slowed significantly over the past year — to 3.7 percent in August, down from 9.1 percent at the 2022 peak — as pandemic-related disruptions have eased and prices for goods that were in short supply rose. have decreased or are growing more slowly.
The Fed’s preferred inflation indicator, which is released with a greater delay than the Consumer Price Index measure, rose gradually on a monthly basis in August after food and fuel prices are stripped out to give a clearer sense of the inflation trend. Expected to climb. ,
This easing is undeniably good news – it makes it more likely that the Fed can slow the economy enough to reduce price increases without putting pressure on the economy. But policymakers may be concerned about completely eliminating inflation in an economy that is still growing strongly, said former Fed economist William English, now a professor in the practice of finance at Yale.
If consumers are still willing to spend, companies may find that they can still raise prices to maintain or preserve profits. Given this, officials may think that bringing inflation down to their 2 percent target would require a more pronounced economic slowdown.
“The economy has been stronger for longer than they thought,” Mr. English said. Given this, Fed officials may say that their next move is more likely to be a rate increase than a rate cut.
Mr. English doubts that Fed officials think they can completely cool price rises without causing an economic recession.
“I suspect they’re expecting, as is their most likely forecast, that they’re going to get pure deflation,” he said. “I think that’s still their base case: The economy is actually going to face a period of fairly slow growth.”