Fed meeting June 2023: Interest rate decision to be taken amid inflation fears

Washington DC
CNN
—

In a key meeting that could change the direction of the US economy, the Federal Reserve is expected to announce on Wednesday that it will keep interest rates steady after raising them 1[ads1]0 times in a row to bring down historically high inflation.

That doesn’t mean the Fed is done hiking entirely, though: Officials have characterized their expected move as a “skip” rather than a “pause.” That could give the economy a little more time for the central bank’s aggressive rate hike campaign to filter through — and allow Fed officials to decide whether higher rates are reducing inflation as expected, or whether they need to keep their foot on the gas.

Research shows that it takes at least a year before rising interest rates have a major impact on the real economy, typically by slowing down employment and consumer purchases. The Fed began raising interest rates in March 2022.

Inflation as measured by the consumer price index slowed last month to the slowest annual pace since March 2021, the Bureau of Labor Statistics reported Tuesday. Prices are still rising twice as fast as the Fed wants, but raising interest rates too much, too quickly, could tip the economy into recession. So this week’s good news on inflation, released as Fed officials kicked off their two-day policy meeting, likely underscores the consensus that it’s time for the central bank to pull back.

Inflation isn’t the only gauge that suggests officials may have already tightened the economy’s reins enough to justify a jump.

Interest-rate-sensitive parts of the economy, such as housing and finance, have slowed somewhat, and the broader economy is likely to catch up sometime soon, economists say.

Credit conditions are tighter after the collapses of three regional banks. Economists say keeping the benchmark federal funds rate in a range of 5-5.25% could be a sensible move for a banking sector that remains under pressure.

Regional bank stresses at the moment “aren’t getting worse, but they probably aren’t getting much better either,” noted Michael Gapen, managing director and head of U.S. economics at BofA Global Research.

The Fed’s emergency lending has eased only slightly in recent weeks, and regional banks continue to struggle with low profitability, higher capital costs, commercial real estate issues, upcoming regulations and Treasury maturity issues.

Banks are expected to continue to tighten their lending standards as the economy slows further and American consumers pare down their savings, pile up debt and eventually lose weight after a stunning recovery from the pandemic’s economic toll.

The Fed may be taking a breather this month, but Fed Chair Jerome Powell is likely to clarify at his press conference at 2:30 PM ET on Wednesday that a July rate hike is still in play.

While inflation has cooled from 9.1% in June to 4% last month, it remains punishingly high for American consumers.

“Job growth is still strong, inflation is pretty sticky, so there is reason for more hikes,” said Michael Feroli, chief U.S. economist at JPMorgan Chase.

Of course, that decision largely depends on what economic data shows in the coming weeks. If job growth and wage growth slow, and inflation continues to ease, the Fed may just keep interest rates steady again, Feroli said. And the opposite is likely to induce a hike.

Some Fed officials have said they still believe more rate hikes are necessary to successfully bring inflation down to the central bank’s 2% target, including the Fed’s most hawkish voice, Federal Reserve Bank of St. Louis President James Bullard (who did not is a voting member). this year). Even more centrist Federal Reserve Bank of Dallas President Lorie Logan said in a speech last month that she is not yet convinced that inflation is on any path toward the 2% target.

The Fed is also set to release its latest summary of economic projections on Wednesday, a set of forecasts by Fed officials for various economic indicators. The quarterly update will reflect the likely interest rate path. The latest set of estimates showed that most officials expected the benchmark lending rate to reach a range of 5.13-5.37% in 2023 – indicating that rates could remain stable for the rest of this year. If predictions show that the benchmark interest rate for lending will rise this year, it may indicate that a further rate increase is coming soon.

The trajectory of the labor market remains a focus for officials because of its persistent impact on inflation. Ben Bernanke, a former Fed chairman who ran the central bank during the Great Recession, argued in a recent article that the tight labor market has had a smaller but growing impact on inflation that can only be remedied by an economic downturn.

The current labor market has contributed to stubbornly high inflation: The US economy is service-based and employers in that sector continue to struggle to hire. That means companies have to pay workers more to keep the staff they have – and to attract new talent. This increases wage growth, according to Gapen.

“The Fed really needs to wait until the labor market cools before it can even consider a rate cut,” said Ira Jersey, chief strategist at Bloomberg Intelligence.