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Fed meeting: what to expect from interest rates

Federal Reserve officials are expected to leave interest rates unchanged at their meeting Wednesday, giving themselves more time to assess whether borrowing costs are high enough to burden the economy and combat inflation under control.

But investors will likely focus less on what policymakers do on Wednesday — and more on what they say about the future. Wall Street will be closely watching whether Fed policymakers still plan to raise interest rates again before the end of the year or whether they are moving closer to the next phase of their fight against rapid inflation.

Central bankers have already raised interest rates to a range of 5.25 to 5.5 percent, the highest level in 22 years. By making it more expensive to borrow to buy a home or expand a business, they are trying to slow demand across the economy, making it harder for businesses to charge more without losing customers and slowing the rise prices.

Officials predicted in their latest quarterly economic forecasts – released in June – that they would likely raise rates again before the end of 2023. They maintained that possibility throughout the summer, even as inflation began to fade significantly. But top policymakers have appeared less willing to make a new decision in recent weeks.

Fed Chairman Jerome H. Powell suggested in June that further adjustment was “likely.” More recently, including in a widely-watched speech in August, he said policymakers could raise rates “if appropriate.”

Fed officials will release their economic projections after their meeting this week, which takes place Tuesday and Wednesday, offering a new look at whether most policymakers still think a final rate hike is likely. ‘be necessary. The projections will also show how officials are interpreting a confusing moment in the economy, where consumer spending has been stronger than many economists expected, even as inflation has calmed a little more quickly.

Taken together, the revised forecasts, the Fed’s statement and a news conference with Mr. Powell after the meeting could provide the clearest signal yet on how close the central bank believes it is to the end of the hikes. rate – and what is the next phase of testing. what a total fight against inflation could look like.

“Many centrist Fed officials have said in recent weeks: We are close to where we need to be — we might even be there,” said Michael Feroli, chief U.S. economist at JP Morgan.

Mr. Feroli estimates that there is about a two-thirds chance that policymakers will predict another rate hike, and a one-in-three chance that they will predict that the current interest rate will likely be the maximum interest rate.

But even as the Fed signals that interest rates have peaked, officials have made clear that they are likely to remain high for some time. Policymakers believe that simply keeping interest rates high will continue to weigh on economic growth and gradually slow down the economy.

Mr. Feroli doesn’t expect officials to start talking too decisively about the next phase — the one in which rates fall — just yet.

“They haven’t won the war against inflation, so it would be a bit premature,” Mr Feroli said.

That said, economic forecasts might offer some clues. Fed officials will release their interest rate projections for 2024, 2025 and – most recently – 2026 after this meeting. In June, their projections for 2024 suggested officials expected to cut borrowing costs four times next year. The question is when in the year these cuts would come and what officials would need to feel comfortable with a rate cut.

Policymakers could provide little clarity on those points Wednesday, hoping to avoid a significant market reaction — one that would make their job of cooling the economy more difficult.

If stocks were to soar as markets widely began to anticipate that Fed-induced financial and economic restrictions were likely to occur sooner, that could make it cheaper and easier for businesses and households to borrow money. money. This could speed up the economy as the Fed tries to slow it down.

Growth has already been surprisingly resilient in the face of high Fed rates. Consumers and businesses have continued to spend at a healthy pace despite numerous economic risks weighing on the outlook, including the resumption of federal student loan payments in early October and a possible government shutdown after the end of this month.

Remaining household savings from the pandemic, a strong job market with robust wage growth, and various government policies intended to spur investment in infrastructure and green energy could help fuel this momentum.

That resilience could lead to another revision of the Fed’s economic forecast on Wednesday, Goldman Sachs economists said: Officials could revise upward their estimate of the so-called neutral rate, which indicates how high interest rates should be to weigh on the economy. . This suggests that while politics is holding back the economy today, it is not doing so as intensely as officials would have imagined.

The sustainability of the economy could also prevent policymakers from appearing too enthusiastic about the recent slowdown in inflation.

Rises in the consumer price index have moderated significantly over the past year – to 3.7% in August, down from 9.1% at their 2022 peak – as disruptions from the pandemic fades and prices of scarce goods fall or rise more slowly.

The Fed’s preferred inflation gauge, which is released later than the Consumer Price Index, is expected to have risen slowly on a monthly basis in August after food and fuel prices were suppressed for give a clearer idea of ​​the inflation trend. .

This moderation is undoubtedly good news: it makes it more likely that the Fed will be able to slow the economy just enough to curb the rise in prices without sinking the economy. But policymakers might worry about completely eradicating inflation in an economy that continues to experience robust growth, said William English, a former Fed economist who is now a finance professor at Yale.

If consumers are still willing to spend, companies may find they can still raise prices to increase or protect profits. Under these conditions, policymakers may believe a deeper economic slowdown will be necessary to bring inflation back to their 2 percent target.

“The economy has remained strong longer than anyone thought,” Mr. English said. Under these conditions, Fed officials could maintain that their next move is more likely to be a rate hike than a rate cut.

Mr. English is skeptical that Fed officials believe they can completely curb rising prices without further economic slowdown.

“I doubt they are expecting, as the most likely forecast, impeccable disinflation,” he said. “I think that’s still their base case: The economy really needs to be in a period of pretty slow growth.”


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