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 is expected to raise rates a quarter point to the 5.25% to 5.5% range, an 11th increase since early 2022. It will release the decision at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later.
Investors will be listening for clues from 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 penciled in a final hike later in the year.
“They will be leaving all options open,” said Veronica Clark, an economist at Citigroup Inc. “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% target over time. Still, 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 Kathy Bostjancic, chief economist at Nationwide Life Insurance Co.
What Bloomberg Economics Says...
“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, signaling a skip at the September meeting – a skip that we believe will turn into an extended pause.”
— Anna Wong, chief US economist
For full note, click here
FOMC Statement
The statement is likely to leave in place its guidance that hints at possible “additional policy firming.” It’s 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.
Following the failure of three US banks, the committee has included a statement of confidence in the banking industry, describing it as “sound and resilient.” With stresses having diminished, the committee could debate dropping that statement as no longer necessary, say Deutsche Bank AG economists.
Dissents
Powell has maintained a strong consensus on the committee, with the last dissent in June 2022. That record of no dissents is very likely to continue.
Press Conference
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.
“The question after the meeting is, do they go again?” said Vincent Reinhart, chief economist at Dreyfus and Mellon who previously spent more than two decades working at the Fed. “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.”
Powell will also be asked his assessment of the latest consumer price reading, which showed the annual rate of inflation dropping to 3%. If he is leaning toward another hike, he might want to downplay the importance of a favorable report. The Fed is focused on a separate measure of inflation, based on personal consumption.
While 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.
