The Fed is preparing to raise interest rates with the winds of summer

WASHINGTON, June 14 (Reuters) – The Federal Reserve is expected to leave interest rates unchanged on Wednesday for the first time since the US central bank launched a historic, aggressive round of monetary tightening in March 2022.

But don’t call it pivot or pause.

Policymakers may indicate at the end of their two-day meeting that more price increases are still to come once they take time to assess how the economy is developing, whether the financial system remains stable, and whether inflation continues to decline.

said Blarina Orochi, chief US economist at the fixed-income division of the T. The “close” reading of the data showed that both could weaken.

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

The Fed is scheduled to release its new quarterly economic policy statement and outlook at 2 PM ET (1800 GMT). Fed Chairman Jerome Powell will hold a press conference in half an hour.

A sense of caution about the economy competing with lingering inflation fears has pushed the Fed to this point, on the verge of what analysts call a “hard-hitting”.

While an increase in borrowing costs will likely be abandoned after 10 consecutive hikes have pushed the benchmark overnight rate into the current range of 5.00%-5.25%, Fed policymakers are expected to simultaneously show in their language and projections that one or possibly two increases will still be needed. by an additional quarter of a percentage point by the end of 2023.

policy settlement

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

The economy continues to post strong monthly gains in jobs and wages, and one of the closely watched measures by the US central bank – the ratio of open jobs to the number of unemployed – has recently increased in a sign that the labor market remains imbalanced between demand for workers and those available.

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

However, some forward-looking price measures show that inflation could be heading sharply lower in the coming months. The unemployment rate jumped dramatically from 3.4% to 3.7% in May. Annual growth in bank lending is edging toward zero, part of the credit slowdown The Fed is watching warily for signs of financial industry stress.

The expected policy outcome reflects a compromise born of some uncertainty about what it all means, with Fed officials worried that the economy could weaken quickly and get at least six weeks until the July 25-26 meeting, and those worried about the still high . Inflation readings knowing that the central bank will remain ready to raise interest rates if price pressures do not abate.

The decision won’t mean that rate hikes will stall for long, or – a point Powell is likely to stress – that rate cuts are expected anytime soon.

The Fed’s latest set of quarterly projections projected that the benchmark interest rate would drop overnight only by the end of 2024 as inflation fell as well — moves that keep the inflation-adjusted interest rate roughly the same. A real “pivot” toward more flexible policy was only seen to happen in 2025, when by the end of the year the policy rate was expected to fall more than inflation.

(Reporting by Howard Schneider). Editing by Paul Simao

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