Global Courant
Federal Reserve Chairman Jerome Powell holds a press conference following the announcement of the US Fed’s policy decision on interest rates, in Washington, May 3, 2023.
Kevin Lamarque| Reuters
After a 10-meeting series of rate hikes, the Federal Reserve is expected to take a break on Wednesday to allow the US economy to catch its breath.
Markets are estimating the likelihood that central bank policymakers will “skip” this month – a phrase they generally prefer to “pause” as they process the impact of 5 percentage points of increases from March 2022.
That doesn’t mean this will be the end of the walks. It just means that, with the rate of inflation slowing down, officials might feel that now is a good time to evaluate.
“They kind of set things up for a break,” said Bill English, a former Fed official and now a finance professor at the Yale School of Management. “So they’ll probably pause, but I think they’re very keen to avoid a result in markets where investors say, ‘Hurray! The tightening cycle is over.'”
There will indeed be many moving parts in Wednesday’s Fed action. Here’s a look at what to expect.
prices
If the Federal Open Market Committee, which sets interest rates, chooses to pause, the benchmark lending rate will remain within a target range of between 5% and 5.25%.
In the eyes of the market, Tuesday’s consumer price index report, which showed 12-month inflation fell to a two-year low of 4%, confirmed that decision.
However, the post-meeting statement could be so massaged that markets don’t assume that policymakers have sat still with inflation and are determined to stop the cycle of rate hikes.
“This could be a one-way communication that they’re leaning toward raising rates, but they’re not ready to commit to it. They want a little more information on how things are going,” English said. “A hawkish pause, if you will, is something that could get some pretty broad support.”
The ‘dots’ and the economic outlook
If an aggressive break does indeed become the order of the day, investors will look to the “dot plot,” a graph of individual members’ expectations of where prices will go from here.
The common chatter – reflected in market prices – is that the dots will “go up” and indicate an additional rate hike this year, likely at the July 25-26 meeting.
The last time the points were updated, at the March meeting, there was a wide disparity among members, with 7 of 19 FOMC members expecting rates to rise above the current range.
Along with the dots, members will update the Summary of Economic Projections, which presents the outlook for gross domestic product, the unemployment rate and inflation as measured by the personal consumption expenditure price index. Market expectations are that growth prospects are likely to improve, even though the Fed’s own economists said in March and June that they expect a credit contraction to trigger a shallow recession later this year.
The Fed’s communication will then likely be, “We’re not convinced this is the end of rate hikes, but we want to see what damage the banking crisis has done to the economy.” said Mark Zandi, chief economist at Moody’s Analytics. “It also recognizes that there’s a lag between what we do and when it shows up in the economy and inflation. So we’re going to pause here.”
The Powell Press
After the statement and projections are released, Fed Chairman Jerome Powell will stand alongside field questions from the press and explain the intentions behind the actions.
He is widely expected to strike a cautious tone, emphasizing the importance of curbing inflation rather than focusing too much on the FOMC’s decision to hike rates.
“The press conference will likely emphasize that just because we didn’t walk at a particular meeting doesn’t mean we’re done walking,” said Dean Maki, chief economist at Point72. “He will be very explicit about that. At the same time, I don’t think he wants to commit to an increase in July.”
Striking the balance between enough aggression to reduce inflation without tanking the economy is the Fed’s ultimate goal.
According to Goldman Sachs, central banks that pause according to history usually start walking as soon as they discover that inflation has not been conquered.
“We expect that any pauses are likely to be driven by upward inflationary surprises rather than tight labor markets, as the current inflation overrun remains the main problem central banks are trying to solve,” Goldman economists Giovanni Pierdomenico and Joseph Briggs said in a client note. .
Powell and his colleagues have generally expressed confidence that they can control policy levers to reduce inflation without triggering a recession. But there are no guarantees and a recession remains the most likely case for most economists.
“The risk of continuing to raise interest rates is that something more structurally breaks than has been the case so far,” said Ed Yardeni, head of Yardeni Research. “Then they would have to cut interest rates if they trigger a recession. In the past, we’ve had very few periods where Fed Funds rates went up and then stayed flat. Most of the time, the Fed exaggerates.”
