All eyes will be on the Federal Reserve on Wednesday as it concludes a crucial political meeting in Washington, DC, the outcome of which will have consequences for millions of American families and businesses, as well as the economy, ahead of the midterm elections.
For the first time in 22 years, the central bank is expected to raise interest rates by half a percentage point, part of a series of aggressive measures it is expected to take to cool the economy in the midst of the worst inflation in 40 years.
In March, the Fed raised its reference rate for the first time since the end of 2018, increasing it by a quarter of a percentage point.
But since then, inflation has continued to plummet, reaching a new 40-year high. While the labor market has recovered further, the Fed’s more normal pace with a quarter percentage point increase may not reduce it this time.
Economists – including some in the Fed – believe that America is approaching what experts call “maximum employment.” And with the Russia-Ukraine conflict still raging, it is unlikely that the price pressure on things like food and energy will abate immediately. This provides a perfectly tight monetary policy cocktail.
Nevertheless, investors have already priced in the expected interest rate increase – after Federal Reserve chief Jerome Powell said last month that a half-point increase “will be on the table” – so the stock market should not be shocked by Wednesday afternoon’s policy announcement. The devil will be in the details and in the guidance of the Fed’s policy-making committee, as well as the plans for its enormous balance.
“I expect the Fed to signal that a new half percentage point increase is likely in their next decision in June, and that further increases – probably no specs on quantity or size – will come in the second half of the year,” said Bill Adams, chief economist. and Comerica Bank.
“The Fed wants short-term interest rates to return to a level that is at least neutral – which means neither adding to or subtracting growth – as quickly as possible without causing turmoil in the financial markets,” Adams added.
Yet it is difficult to say exactly where this neutral level is. It could be around 2.5% or below, according to Adams.
The central bank’s decision will be published at 14.00 ET, followed by the first personal press conference with Chairman Powell since the pandemic began.