Despite a steady easing of inflation throughout the year, the Federal Reserve‘s policymakers remain concerned about the pace of rising prices and are highly likely to raise their key interest rate by a quarter-point on Wednesday.
This rate increase, the 11th in 17 months, would push the Fed’s short-term rate to approximately 5.3%, the highest level since 2001. Similar to previous rate hikes, this move is expected to raise the costs of mortgages, auto loans, credit cards, and business borrowing.
Despite encouraging economic news leading to rising stock prices, increased consumer confidence, and hopes of achieving a “soft landing,” where inflation gradually slows to the Fed’s target of 2% without causing a recession, another rate hike is expected. Inflation in June was at 3% compared to the same period the previous year, down significantly from a peak of 9.1% in June of the previous year. Consumers continue to spend, with increased air travel, international trips, and attendance at concerts and movies. Businesses are hiring, and the unemployment rate remains near its lowest level in decades.
However, the planned rate hike indicates that risks still exist. Underlying inflation remains above the Fed’s target. Core inflation, which excludes volatile food and energy prices, rose by 4.8% in June compared to the same month the previous year. As long as inflation remains elevated, the Fed will likely maintain higher interest rates or even raise them further.
In June, policymakers signaled that they anticipated two more rate increases, including the expected hike on Wednesday. Some economists are concerned that too many rate hikes could trigger a recession.
The main question at the news conference on Wednesday for Chair Jerome Powell will be whether and when the Fed will decide to halt rate increases. Powell is not expected to give a clear answer and will likely emphasize that future rate decisions will depend on economic indicators between now and the next meeting in September.
By the September meeting, the Fed will have more data, including two additional monthly inflation reports, employment and unemployment figures, and data on consumer spending and wages. Powell will also speak at the Jackson Hole symposium in late August, an opportunity to signal potential shifts in Fed policy.
Though Powell has emphasized that rate decisions will be made on a meeting-by-meeting basis, some analysts believe the Fed may decide to skip a rate hike at the September meeting, similar to its decision in June. If this happens, the option to impose a quarter-point hike at the November meeting would still be available.
However, most economists anticipate that inflation and the economy will have cooled enough by November to no longer require another rate hike. If this is the case, the rate increase on Wednesday would be the final one for the year.
The Federal Reserve began tightening credit before many other developed countries. But now, most other central banks are following a similar path. The European Central Bank is expected to announce its own quarter-point rate hike on Thursday. Inflation has declined in the eurozone, but it remains higher there than in the United States.
The Bank of Japan is expected to keep its policies unchanged at the next meeting, despite creeping inflation in the country after two decades of deflation. The Bank of England has been among the most aggressive in Europe, raising its key rate to 5% last month, the highest in 15 years. In the UK, inflation has remained persistently high.
On Friday, the US government will release new data on consumer spending in June and an update on the Fed’s preferred inflation gauge. The inflation measure is expected to slow to 3% compared to the previous year, similar to the government’s consumer price index. This would be a significant decrease from the 3.8% year-over-year increase reported in May.
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