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The Fed is ready to raise interest rates in the summer wind




WASHINGTON, June 1[ads1]4 (Reuters) – The Federal Reserve is expected to keep interest rates unchanged on Wednesday for the first time since the U.S. central bank began a historically aggressive round of monetary policy tightening in March 2022.

But don’t call it a pivot or a break.

Policymakers at the end of their two-day meeting may well signal that more rate hikes are still to come as they take time to assess how the economy is developing, whether the financial system remains stable and whether inflation continues to fall.

Reuters Graphics Reuters Graphics

“We probably need a little more tightening, but it’s not clear how much,” said Blerina Uruci, chief U.S. economist in the fixed income division at T. Rowe Price Associates, noting that despite the strength in recent employment and core inflation reports, “nuanced” reading of the data showed that both may be set to weaken.

“When there is so much uncertainty, it makes sense to proceed cautiously,” she said.

The Fed is scheduled to release its policy statement and new quarterly economic estimates at 2 p.m. EDT (1800 GMT). Fed Chair 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 Fed to this point, bordering on what analysts call a “hawkish jump.”

While they are likely to forego an increase in borrowing costs after 10 consecutive hikes that have pushed the overnight benchmark rate to today’s range of 5.00% – 5.25%, at the same time Fed policymakers are expected to show both in their language and forecasts that one or perhaps there will still be a need for a further two quarters of a percentage point by the end of 2023.

POLITICAL COMPROMISE

Data since the last Fed meeting in early May have left policymakers with a tough set of signals to read, and plenty of room for debate.

The economy continues to generate strong monthly job and wage growth, and one of the Fed’s more closely watched measures – the ratio of open jobs to the number of unemployed – rose recently in a sign that the labor market remains misaligned between the demand for workers and those available .

Inflation is declining only slowly, and some aspects of it are proving more persistent than expected. The closely watched consumer price index excluding food and energy hasn’t improved much this year, rising at a 4.7% annual rate as of April, more than double the Fed’s 2% target.

Nevertheless, some forward-looking price targets show that inflation may be set to fall sharply in the coming months; the unemployment rate rose significantly, from 3.4% to 3.7%, in May; and the year-over-year growth rate of bank lending plunges toward zero, part of a credit crunch that the Fed is watching closely for signs of stress in the financial services industry.

The expected policy outcome reflects a compromise born of some uncertainty about what it all means, with Fed officials concerned that the economy could weaken quickly and given at least a six-week timeout until the 25-26 meeting. July, and those worried about continued high inflation readings knowing that the central bank will remain ready to move interest rates higher if price pressures do not ease.

The decision will not mean that interest rate hikes are in for an extended hiatus, or – a point Powell is likely to emphasize – that rate cuts are expected anytime soon.

The Fed’s latest set of quarterly projections projected that the benchmark overnight rate would only decline toward the end of 2024 as inflation also fell — moves that keep the inflation-adjusted rate roughly the same. A real “pivot” towards looser policy was first seen in 2025, when the policy rate at the end of the year was projected to fall more than inflation.

Reporting by Howard Schneider; Editing by Paul Simao

Our standards: Thomson Reuters Trust Principles.

Howard Schneider

Thomson Reuters

Covers the US Federal Reserve, monetary policy and the economy, educated at the University of Maryland and Johns Hopkins University with previous experience as a foreign correspondent, economics reporter and local staff for the Washington Post.



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