Fed Expected to Pause Rate Hikes on Wednesday, Yet Signals More Increases Ahead
Pivotal Fed meeting today may pause rapid rate hikes. Another potential hike in July keeps markets on edge.
For the first time in 15 months, the Federal Reserve is likely to hold off on increasing interest rates at the critical meeting on Wednesday. This decision comes after a series of aggressive rate hikes designed to curb inflation. However, another rate hike may be imminent as early as their late July meeting, according to top Fed officials.
Chair Jerome Powell and other officials have communicated their intention to evaluate the potential economic weakening caused by reduced bank lending, a consequence of rising interest rates. Concerns are also high regarding the potential impact of the recent collapse of three large banks on lending activity.
Despite these concerns, the Federal Reserve sees a pause in the rate hike as a strategy to bring unity among the divided committee members. The 18-member committee is split between advocating for one or two more rate hikes and pausing further hikes to observe the progression of inflation.
Consumer prices reported a modest 4% rise in May year over year, a significant drop from April's 4.9% annual increase, providing some reassurance for both camps in the committee. Despite this, core inflation rates, excluding food and energy costs, remain high at 5.3% year-on-year, above the Fed's 2% annual target.
However, the continuous decline in overall inflation rates suggests that the Federal Reserve's rate hikes are working. The headline interest rate has increased by 500 basis points (5%) since March 2022, significantly affecting the costs of mortgages, auto loans, credit cards, and business borrowing.
Economists predict a stabilization of interest rates if the expected reduction in core inflation is confirmed later this year. At present, one final rate hike is expected in July, potentially bringing the key rate to 525-550 bps.
Despite uncertainties, the economy has performed better than expected, with consistent hiring and robust consumer spending. As a result, the Fed's updated forecasts may project a modest increase in economic growth and a lower unemployment rate. Inflation estimates may also rise, with year-over-year core inflation projected to reach 3.8% by year-end, up from March's forecast of 3.6%.
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