The Federal Reserve is set to signal that it plans to continue imposing higher interest rates on the US economy, even if it again slows the pace at which it raises its benchmark rate as inflation rises. reached a peak.
In their first rally of the year this week, U.S. central bank policymakers are expected to return to a more typical pace of rate hikes, implementing a quarter-point hike that will take the federal funds rate to a new target range of 4.50. percent to 4.75 percent.
The shift comes as the Fed has repeatedly hiked the federal funds rate with unusually large increases — including four consecutive 0.75 percentage point hikes last year — in an effort to rein in the price spiral. At its previous meeting in December, it had opted for a half-point increase.
However, lingering skepticism about how quickly inflation will continue to decline has put pressure on the central bank to maintain a hawkish stance to stave off speculation that it is considering pausing its monetary tightening campaign by imminent manner.
“I expect the move to a 25 basis point rate hike to come with ‘we have more work to do’ language,” said Jonathan Pingle, a former Fed economist currently at UBS. “It’s going to be a meeting where they’re going to try not to be too dovish.”
The policy statement that accompanies the rate decision will be closely scrutinized for any changes to guidance provided since last March, which said the Federal Open Market Committee expects “continued increases in the target range to be appropriate.” “.
Many expect the Fed to hold that line or attenuate it to a minimum, and Chairman Jay Powell to double down on the message at Wednesday’s press conference. A shift in language to “further tightening,” for example, could suggest the Fed is closer to ending its rate hike cycle.
The decision to slow the pace of tightening again comes as Fed officials seek to gain flexibility as they approach a benchmark rate “tightly enough” to keep inflation in check. They also want to buy more time to assess incoming data, which has become mixed as their policy actions have begun to take effect.
Lael Brainard, the vice chair who is among the most dovish members of the FOMC, recently warned that “the full effect on demand, employment and inflation of the cumulative tightening that is underway is yet to come. “.
Business activity, particularly in manufacturing, has already taken a hit alongside the housing sector, as Americans spend less easily and more often by dipping into savings or taking on debt to cover expenses. It comes as companies begin to cut costs, cut worker hours and cut temporary help.
Wage growth has slowed but remains strong in a tight labor market, which is keeping pressure on prices across the service sector. Fed Governor Christopher Waller has warned of being ‘rigged’ by positive data as core inflation remains too high, saying he needs a full six months of evidence to feel confident about halting rate hikes.
“The difficult decision [of when to pause] isn’t quite there yet,” said Ellen Meade, who served as a senior adviser to the Fed’s Board of Governors until 2021. “Powell probably doesn’t want to stop until he thinks he’s ready to stop and hold on for a while.
Most officials say the federal funds rate will have to rise above 5% and that this level will be maintained until 2024. However, traders on Wall Street have rejected this opinion, setting a maximum benchmark rate of less than 5%, with about half a percentage point reductions by December. Financial conditions have also eased, threatening to thwart some of the ongoing tightening.
“Market-determined rates are where the rubber really meets the road in passing tighter terms and where one of the strongest impacts on the economy occurs,” said former Fed Chairman Dennis Lockhart. from Atlanta.
“A quarter-point cut could encourage the narrative in the markets of a rate cut in the second half. That’s not necessarily what the committee wants as a total inflation-fighting program.
Donald Kohn, a former vice chairman of the Fed, said the central bank could defend itself against easier financial conditions with its rhetoric and, if necessary, higher interest rates than it announced.
Lorie Logan, Dallas Fed Chair and voting member of the FOMC, recognized this in a recent speech, when she said the central bank “can and, if necessary, should adjust our overall policy strategy to maintain conditions financial restrictions even if the pace slows down”.
“Their mission this year is to completely extract excessive inflationary pressures from the economy. [and] I don’t think they’re in the mood to give up too soon,” Lockhart said. “The Fed is playing a high-stakes, long-term game.”