WASHINGTON – The US Federal Reserve policymakers are poised to hike interest rates to the highest level in 22 years, while retaining a tightening bias that signals the possibility of an additional move later in the year.
The Federal Open Market Committee (FOMC) is expected to raise rates a quarter point to the 5.25 per cent to 5.5 per cent range, an 11th increase since early 2022. It will release the decision at 2pm in Washington. Chairman Jerome Powell will hold a press conference 30 minutes later.
Investors will be listening for clues from Mr Powell about how determined the central bank is to raise again in 2023. With inflation pressures diminishing last month, investors see Wednesday’s decision as almost certain but expect no additional increases, while the FOMC in June pencilled in a final hike later in the year.
“They will be leaving all options open,” said Ms Veronica Clark, an economist at Citigroup. “They will certainly stay cautious after only a couple of months of softer inflation data, which is not enough for them to be convinced the job is done.”
A July hike would follow a pause in June that was intended to slow the pace of increases as they approach a level believed to be restrictive enough to return inflation to their 2 per cent target over time. Still, Mr Powell and other policymakers will want to sound resolute to avoid recurrences of surging prices.
“They want to avoid the mistakes of the 1970s and ’80s when they took their foot off the brake prematurely,” said Ms Kathy Bostjancic, chief economist at Nationwide Life Insurance.
Bloomberg’s chief US economist Anna Wong said: “With recent economic data seemingly bolstering the chances of a soft landing, the FOMC is unlikely to rock the boat. Powell will adopt a wait-and-see approach, signalling a skip at the September meeting – a skip that we believe will turn into an extended pause.”
The FOMC statement is likely to leave in place its guidance that hints at possible “additional policy firming”. It is also likely to continue to describe economic growth as “modest”, despite mostly upbeat data ahead of Thursday’s gross domestic product release. The committee could debate whether to acknowledge recent inflation progress or simply say it remains elevated.
Mr Powell will be asked in the press briefing whether the FOMC’s forecast in the June “dot plot” in the Summary of Economic Projections calling for another hike is still intact, in light of better-than-expected inflation news in June.
Mr Vincent Reinhart, chief economist at Dreyfus and Mellon who previously spent more than two decades working at the Fed, said: “The question after the meeting is, do they go again?
“You listen at this meeting to see how much Powell at the press conference embraces the Summary of Economic Projections or puts some distance in.”
Mr Powell will also be asked his assessment of the latest consumer price reading, which showed the annual rate of inflation dropping to 3 per cent. If he is leaning toward another hike, he might want to downplay the importance of a favourable report. The Fed is focused on a separate measure of inflation, based on personal consumption.
While Mr Powell has said he sees a narrow path for a soft landing, the Fed staff has predicted a US recession, according to minutes of recent FOMC meetings. With recent signs of a resilient economy, the chair is likely to be pressed on his view and whether the staff is still in the recession camp. BLOOMBERG
