The US Federal Reserve is preparing to pause its interest rate hikes on Wednesday, after 10 consecutive increases in the past 15 months, to gauge the impact of its aggressive push to rein in inflation.
However, central bank officials have warned that the pause will be short and there will likely be another hike at its next meeting in late July.
Fed Chairman Jerome Powell and other panel members have indicated they want to assess how much a decline in bank lending might be weakening the economy. Banks have reduced their lending, and the demand for loans has decreased as interest rates rise.
Some analysts have expressed concern that the collapse of three big banks this spring could cause nervous lenders to sharply adjust their credit ratings and worsen the lending situation.
However, Goldman Sachs economists have estimated that such damage will be modest.
For the Fed, the “pause” on rate hikes at this week’s meeting may be the most effective way for Powell to unify his policymaking committee’s differences.
The 18-member committee seems divided between those who favor one or two more rate hikes and those who would like to leave the rate where it is for at least a few months and see inflation moderate further. This group worries that too aggressive momentum increases the risk of causing a deep recession.
A government report on inflation on Tuesday offered some ammunition to both camps, with overall price gains slowing sharply, but some measures of core inflation remained high.
Consumer prices as a whole rose a modest 4% in May from 12 months earlier, the smallest increase in more than two years and well below April’s 4.9% annual increase.
However, much of that drop reflected much lower gasoline prices and the slowdown in food inflation. Excluding volatile food and energy costs, uncomfortably high inflation persisted: so-called core prices rose 5.3% yoy, down from 5.5% in April but well above April’s 2% annual target. the fed.
At the same time, the gradual but steady decline in headline inflation suggests that the Fed’s rate hikes have had some success. However, the increases have led to much higher costs for mortgages, car loans, credit cards and business loans.
The Fed’s goal is to accomplish the delicate task of slowing borrowing and spending enough to cool growth and control inflation, without derailing the economy in the process.
Inflation data on Tuesday showed that most of the increase in core prices reflected high rental and used car prices. Those costs are expected to decrease later this year.
Wholesale used car prices, for example, fell in May, raising the possibility that retail prices will follow suit. And rents are expected to decline in the coming months as new leases are signed with more moderate price increases.
Those lower prices, however, will take time to incorporate the government measure.
Some economists have suggested that if those indicators start to fall and lower core inflation, the Fed could end up keeping its key rate unchanged for the rest of the year. Or politicians could decide to raise their key rate for the last time in July, to around 5.4%, and keep it there.
This Wednesday, Fed officials will also update their quarterly economic projections, including a forecast of what their key rate will be at the end of the year.
Most economists expect the rate to rise from the current 5.1% to 5.4%. That would indicate that the central bank does not believe it has reined in inflation yet. If inflation remains chronically high in the coming months, the Fed may decide to continue raising rates.
The economy has fared better than the central bank and most economists expected at the start of the year. Businesses continue to hire at a brisk pace, which has helped encourage many people to keep spending, especially on travel, dining and entertainment.
As a result, the Fed’s updated forecasts this Wednesday may reflect its expectation that economic growth will pick up, albeit modestly. Analysts say they are likely projecting the economy to expand 1% this year, slow but higher than March’s forecast of an anemic 0.4%.
Fed officials are also likely to forecast a lower unemployment rate than three months ago, perhaps 4.1% by the end of the year, compared with their March forecast of 4.5%. (The current unemployment rate is 3.7%).
In addition, they are likely to raise their inflation estimate, with year-on-year core inflation forecast to hit 3.8% by the end of this year, up from 3.6% forecast in March.
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