The Federal Reserve is set to release its interest rate decision Wednesday afternoon, and investors are widely expecting policymakers to raise borrowing costs by a quarter percentage point, but what do they expect next? We are watching closely for hints as to what might happen.
This is the 10th consecutive rate hike by the central bank and caps the fastest series of rate hikes in 40 years. But for now, it could also be the last one for a central bank.
Fed officials said in a previous round of economic forecasts that they could halt rate hikes once they reach the expected level of 5% to 5.25% on Wednesday. Officials won’t release new economic forecasts after this meeting, so economists are expected to make both the central bank’s 2:00 p.m. policymaking statement and his 2:30 p.m. press conference with Fed Chairman Jerome H. carefully analyze and get a hint of what will happen next. .
Central banks will balance conflicting signals. They’ve already done a lot to slow growth and deal with rapid inflation, but recent turmoil in the banking industry could further dampen demand and the looming battle over the debt ceiling brings new sources of risk to the economy. These are all reasons to be careful. But with the economy looking pretty resilient and inflation showing staying power, it’s possible some Fed officials still feel there’s work to be done.
Here’s what you need to know for Fed day.
Inflation Makes Fed Aggressive
The reason Federal Reserve policymakers are raising interest rates is simple. Inflation has been painfully high for him for two years, and the main means government officials need to bring it down is to raise borrowing costs.
When the Federal Reserve raises interest rates, it becomes harder, and often more difficult, for families to take out loans to buy homes and cars, and for businesses to finance their expansion. Become. This will slow both consumer spending and employment. As wage growth slows and unemployment rises, people become more cautious, further slowing the economy.
If that chain reaction sounds nasty, it’s because: interest rate hike By the early 1980s it was close to 20%. push unemployment 10 percent or more.
However, with demand cooling across the economy, a broader economic slowdown could help keep inflation under control. In a world of discreet family consumption, it is difficult for businesses to charge more without losing customers.
Inflation has been rising at an unusually high rate since the beginning of 2021, and has cooled particularly from a peak of around 9% last summer, but travel and childcare have all been affected. Such price increases are stubborn and may be difficult to eradicate completely.
Interest rates haven’t been this high in over 15 years
To reverse inflation, the Fed has raised interest rates to nearly 5%. The last time rates were above 5% was in the summer of 2007, before the global financial crisis.
What about high interest rates? More expensive mortgages have led to a significant slowdown in the housing market. And while the labor market remains very strong, there are some signs that it is starting to weaken. Not fulfilledBut perhaps most visible is that rising interest rates are starting to cause financial stress.
Since early March, three major U.S. banks have failed, requiring government action, and early Monday morning at a freshly made government-enabled wedding between First Republic and JPMorgan Chase. We’ve reached a climax.
Many banks, which have been under stress in recent weeks, have suffered as the market value of their previous mortgages and securities holdings fell as they failed to adequately defend against rising interest rates.
Fed officials should consider two issues related to the recent turmoil. Will there be more drama as other banks and financial firms struggle with higher interest rates? Will bank troubles slow the economy down significantly?
Mr. Powell was able to tell the world their point of view at the press conference.
The economist is on temporary patrol
Between the financial market upheaval and the Fed rate hike, investors expect policymakers to pause after this move. But don’t think that means the slowdown is over.
Higher Fed rates are like a late reaction drug. They start to take effect quickly, but it will take some time for the full effect to be felt. It could continue to weigh on the economy for months.
It is also possible that the central bank will not actually suspend. Some suggest that if inflation remains high and growth maintains momentum, interest rates could be raised further. However, it is possible that the hurdles for future interest rate fluctuations will rise.
America is under recession watch
With high interest rates and banking problems looming, many economists believe the country could slip into recession. Federal Reserve economists said at the central bank’s March meeting that a mild recession is likely later this year in the aftermath of the banking crisis, based on minutes from the Fed’s last meeting. ing.
Powell will no doubt be asked about it at this press conference. The Fed may have to explain that it wants to prevent a small recession from turning into a big recession.
A gradual slowdown will probably feel very different to those on the ground than a major recession. One is slightly fewer job opportunities, slower wage growth, and less noisy business. Another could involve job losses and insecurity, cuts in working hours and earnings, and widespread moodiness among American consumers.
This is why Wednesday’s Fed meeting is important. These are decisions that will shape the future of the American economy, not just the technical policy adjustments that Chairman Powell discusses.
