WASHINGTON, June 14 (Reuters) – The Federal Reserve is expected to leave interest rates unchanged on Wednesday for the first time since the U.S. central bank kicked off a historically aggressive round of monetary policy in March 2022.
But don’t call it a pivot or a pause.
More rate hikes are coming as policymakers take time at the end of their two-day meeting to assess how the economy is shaping up, whether the financial system is stable and whether inflation is continuing to fall.
“We need a little more tightening, but it’s not clear how much,” said D. Blerina Urucci, chief U.S. economist at Rowe Price Associates’ fixed income division, said despite strength in recent employment and headline inflation reports, a “nuanced” reading of the data showed both could be set for weakness.
“When there’s so much uncertainty, it makes sense to be cautious,” he said.
The central bank is scheduled to release its policy statement and new quarterly economic forecasts at 2pm EDT (1800 GMT). Fed Chairman Jerome Powell will hold a press conference half an hour later.
A sense of caution about the economy competing with ongoing inflation concerns has led the central bank to this position, on the brink of what analysts call a “hawkish skip.”
With borrowing costs likely to avoid rising after 10 consecutive hikes that have pushed the overnight interest rate to the current 5.00%-5.25% range, central bank policymakers will simultaneously tone their language and forecasts for one or two more quarter-percentage point hikes by the end of 2023.
Data from the last Fed meeting in early May provided policymakers with tough signals to read and plenty of room for debate.
The economy continues to post strong monthly job and wage gains, and one of the Fed’s most closely watched measures — the ratio of job openings to the number of unemployed — rose recently, suggesting the labor market is misaligned between demand for workers. and available.
Inflation is only slowly falling, and some aspects of it have persisted more than expected. The closely watched personal consumption expenditures price index, which excludes food and energy, hasn’t improved much this year, rising at a 4.7% annual rate through April, more than twice the central bank’s 2% target.
Some more forward-looking price measures show that inflation will fall sharply in the coming months; The unemployment rate rose significantly from 3.4% to 3.7% in May; And the year-on-year growth rate in bank lending is sliding toward zero, part of a credit crunch, with the central bank watching closely for signs of financial sector stress.
The expected policy decision represents a compromise amid some uncertainty about what it will mean, with central bank officials worried that the economy will weaken rapidly with at least six weeks to go before the July 25-26 meeting, and even higher inflation gauges, if price pressures do not ease. Be aware that the central bank will be primed to raise rates.
The decision doesn’t mean rate hikes are on an extended hiatus, or — a point Powell could emphasize — that a rate cut is expected anytime soon.
The central bank’s last quarterly projections expected the overnight rate to fall only through the end of 2024 as inflation also fell — moves that would keep the inflation-adjusted interest rate roughly the same. Only in 2025, when the policy rate is projected to fall more than inflation, is a real “pivot” toward looser policy seen.
Report by Howard Schneider; Editing by Paul Simao
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A graduate of the U.S. Federal Reserve, monetary policy and economics, the University of Maryland and Johns Hopkins University, he has previous experience as a foreign correspondent, economics correspondent and on the local staff of the Washington Post.