It is anticipated that on Wednesday the Federal Reserve will opt to pause and not raise interest rates. At the conclusion of their two-day meeting, the central bank will deliver an announcement containing projections concerning the economy and rates. Afterward, Chairman Jerome Powell will address the media with a prudent tone and leave open the possibility of future increases.
The Federal Reserve is anticipated to give the U.S. economy a break Wednesday by "skipping" the 10th consecutive rate hike, compared to March 2022 when an increase of 5 percentage points was implemented. As inflation pressures have eased, this presents a good opportunity for the central bank to assess the situation. Bill English, a former Fed official and now a professor at the Yale School of Management, suggested the pause "will very much want to avoid" the impression that the tightening cycle is done. Wednesday's action will include various pieces to consider.
Should the Federal Open Market Committee choose to not move forward, the rate of borrowing would remain between 5% and 5.25%. After Tuesday's report of the consumer price index indicating a two-year low of 4% inflation, this decision has been essentially confirmed by the market.
The post-meeting statement could be subtly altered so that markets do not come to the conclusion that policymakers are now uninterested in inflation and will end the rate-hiking cycle. "This could be a one-sided communication that they are inclined to raise rates but are not quite ready to make a firm commitment," English noted. "A 'hawkish pause' would likely make quite a few people happy."
Investors are likely to observe the "dot plot" if the Fed pauses on increasing rates. This chart projects how many members of the Federal Open Market Committee (FOMC) expect rates to move up in the near future. Market pricing suggests that the dots will suggest an additional rate hike this summer, likely at the July 25-26 meeting. Back in March, there was a wide disparity among the members; seven of the eighteen showed expectations of rates to go higher than the current range. The Summary of Economic Projections also reveals estimates for GDP, unemployment rate, and inflation according to the Personal Consumption Expenditures Price Index. Although the Fed's economists suggested a credit contraction that could trigger a recession towards the end of this year, the communication from the Fed is likely, "We want to inspect the effects of the banking crisis and take into account the lag between action and results before deciding if a rate hike should be implemented." Mark Zandi, Chief Economist at Moody's Analytics, commented on this saying, "We're just going to pause here."
When he takes the podium, Fed Chairman Jerome Powell will likely adopt a cautious tone, pushing for inflation reduction over a rate hike. Dean Maki, head economist at Point72, anticipates that Powell will focus on the fact that not hiking at a given meeting does not mean they will not hike at other times. The challenge for the FOMC is in finding a balance between an aggressive enough policy to bring inflation down while not risking damage to the economy.
Historically, Goldman Sachs suggests that when central banks opt to pause, they usually go on to hike rates again when inflation is not seen to be declining. Goldman economists Giovanni Pierdomenico and Joseph Briggs wrote in a client note that any additional pauses will likely come in response to an unexpected inflation rise, rather than labor market tightness.
Powell and the other FOMC members have expressed confidence that they can control inflation without inflicting a recession. But, as Yardeni Research head Ed Yardeni points out, a recession could still be on the horizon and the danger of increasing interest rates too much is real.
Correction: At the March gathering, seven of 18 FOMC members expected rates to go higher than the current range. An earlier version misstated a figure.
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