The Federal Reserve is expected to stop raising interest rates for the first time in 11 policy meetings on Wednesday. But investors are betting the break won’t last.
The pattern of stopping and then restarting speed increases is becoming well established around the world. The Reserve Bank of Australia paused its own campaign to raise interest rates twice earlier this year, including last week. The Bank of Canada had left interest rates unchanged for four months before unexpectedly raising them again on June 7.
That’s because inflation is proving to be stubborn. In a range of economies from Melbourne to Munich to Miami, it was hard to eradicate. Many central banks are struggling with price increases that are only slowly fading, supported by higher service costs, including things like concert tickets, rent and hotel rooms.
“Everyone has a similar problem,” said William English, a former Fed official who is now studying at Yale University, noting that policymakers in Britain and the Eurozone are facing inflation problems that have much in common with those of the fed. European Central Bank policymakers are also meeting this week and are expected to continue raising interest rates.
Policy may be harder to predict in the coming months as officials try to assess whether interest rates are high enough to ensure their economies are slow enough to curb price increases.
“We’re in the period where we’re kind of groping,” said Mr. English. “It will be a period of great uncertainty.”
The Fed has already raised rates sharply in the past 15 months, to just above 5 percent from May, and that higher rate is trickling through the economy.
In recent speeches, Fed officials have hinted that they could soon “skip” a rate hike to give themselves time to assess the effects of their changes so far, and investors are betting that Fed officials will keep policy stable during their meeting on Tuesday and Wednesday. before interest rates are raised again in July. But those predictions are uncertain: Traders usually have a pretty clear idea of what the Fed might do ahead of its meetings, but this time around, markets see a slim but real chance that US central bankers will hike rates this week.
The doubt is partly due to the fact that the Fed will receive a key inflation measure, the consumer price index, on Tuesday. But it also reflects what a difficult time this is for economic policy in the United States and around the world.
This is the worst inflationary episode in America and many of its similar economies since the 1970s and 1980s, so it’s been a long time since the world’s policymakers have addressed this issue. And while inflation has been ebbing, it has also shown endurance.
In the United States and elsewhere, inflation started in goods such as cars and furniture, but has moved to services such as airline tickets, education and haircuts. This is worrying, because price increases for services are driven by broad economic trends rather than one-off supply problems, and may be more sustainable.
“Service price inflation is proving persistent here and abroad,” Philip Lowe, the governor of the Reserve Bank of Australia, said in a speech explaining the central bank’s surprise move last week.
Fed officials are concerned that today’s price hikes could prove sticky.
Wage increases remain quite rapid, which could limit the rate of price decline as employers try to cover rising labor costs. And while slowing rent increases should cool headline inflation, some economists wonder if that will be enough to bring inflation down steadily.
“A recovery in the housing market raises questions about how sustainable those lower rent increases will be,” Christopher Waller, a Fed governor who often favors higher interest rates, said in a recent speech.
At the same time, central bankers want to prevent the economy from sliding into a recession that is more painful than necessary.
Therefore, the Fed may pause this week. Officials are aware that monetary policy takes months or years to take full effect. And recent banking turmoil could further slow lending and spending, a situation officials continue to monitor.
“Anecdotally, it’s not that bad, but we don’t even have enough research data,” said Yelena Shulyatyeva, senior US economist at BNP Paribas. For more evidence, she will look at a Dallas Fed banking survey this month.
But after Australia and Canada hiked rates last week, investors wondered: Could this also mean the Fed might be more aggressive than expected?
“It is a mistake to make simplistic comparisons,” said Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, noting that the Fed would likely still pause in June, while making a possible move in July. to make. As the rate rises abroad, he underlined that global inflation is proving to be sticky, he said, which is no surprise.
“We know that inflation is falling at a frustratingly slow pace,” he said.
