Federal Reserve officials will announce a rate decision Wednesday afternoon, and while investors widely expect policymakers to raise borrowing costs by a quarter point, they will be watching closely for any hints about what might come next.
This would be the central bank’s tenth consecutive rate hike, capping the fastest streak of rate hikes in four decades. But it could also be the central bank’s last for a while.
Fed officials indicated in their latest series of economic projections that they could stop raising interest rates once they reach a range of 5 percent to 5.25 percent, the level they expect to reach on Wednesday. Officials will not be releasing new economic projections after this meeting, forcing economists to carefully parse both the central bank’s 2 p.m. policy statement and a 2:30 p.m. press conference with Fed chairman Jerome H. Powell for hints about what’s next. comes. .
Central bankers will weigh conflicting signals. They have already done much to slow growth and contain rapid inflation, the recent turmoil in the banking sector could further dampen demand, and an impending fight over the debt ceiling is a new source of risk to the economy. These are all reasons for caution. But the economy has been fairly resilient and inflation is showing sustained strength, which could leave some Fed officials feeling they still have work to do.
Here’s what you need to know as you head into Fed day.
Inflation has prompted the Fed to become aggressive
The Fed’s policymakers are raising interest rates for a simple reason: Inflation has been painfully high for two years, and making money more expensive to borrow is the main tool government officials have to get it down.
When the Fed raises rates, it becomes more expensive and often more difficult for families to take out loans to buy homes or cars or for businesses to raise money for expansions. That slows both consumer spending and hiring. As wage growth slows and unemployment rises, people become more cautious and the economy slows further.
If that chain reaction sounds off-putting, it’s because it can be: When Paul Volcker’s Fed raised interest rates to nearly 20 percent in the early 1980s, it helped drive unemployment above 10 percent.
But by cooling demand across the economy, a widespread slowdown could help bring inflation under control. Businesses are finding it harder to charge more without losing customers in a world where families are cautious about spending.
And getting inflation under control is a big priority for the Fed: Price increases have been unusually fast since early 2021, and while they have notably cooled after peaking at around 9 percent last summer, they are increasingly driven by service sectors such as travel and childcare. Such price increases can prove stubborn and difficult to eradicate completely.
Rates have not been this high in over 15 years
To get price increases back in line, the Fed raised rates to nearly 5 percent — and they are expected to cross that threshold on Wednesday. The last time interest rates rose by 5 percent was in the summer of 2007, before the global financial crisis.
What does it mean to have such high interest rates? More expensive mortgages have resulted in, among other things, a significant slowdown in the housing market. There are also some signs that the labor market, while still very strong, is starting to weaken — hiring is gradually declining and fewer jobs remain unfilled. But what is perhaps most visible is that higher interest rates are starting to cause financial stress.
Three major US banks have failed since early March and have required government responses, culminating in a government-sponsored shotgun wedding between First Republic and JPMorgan Chase early Monday morning.
Many of the banks that have been under pressure in recent weeks have suffered from not being adequately protected against rising interest rates, causing the market value of their older mortgages and securities holdings to fall.
Fed officials will need to consider two issues related to the recent turmoil: Will there be more drama as other banks and financial firms grapple with higher rates, and will the banking woes so far significantly slow the economy?
Mr. Powell could give the world an idea of their mindset at his press conference.
Economists are on pause patrol
Between the banking turmoil and how much the Fed has already raised interest rates, investors expect policymakers to pause after this move. But don’t assume that means the delay is over.
Higher Fed rates are like delayed response drugs: they start working quickly, but take a while to see the full effect. Last year’s moves are still seeping through the economy, and by keeping rates at a high level, officials could continue to squeeze the economy for months to come.
And it could be that central bankers won’t really pause: Some have suggested that if inflation remains brisk and growth continues, they could raise rates further. But it seems possible – even likely – that the bar for future rate movements will be higher.
America is on recession watch
With high rates and banking troubles biting, many economists think the country could head into an economic downturn. Fed staff economists even said at the central bank meeting in March that they likely expected a mild recession later this year in the aftermath of the banking crisis, based on minutes from the Fed’s last meeting.
Mr. Powell will certainly be asked about that at this press conference – and he may have to explain how the Fed hopes to avoid a mild recession turning into a major one.
A slight slowdown would probably feel very different to those on the ground than a major recession. One would relate to slightly less employment, softer wage growth and less turbulent activity. The other may relate to job loss and insecurity, reductions in hours and earnings, and a pervasive sense of depression among American consumers.
That’s why Wednesday’s Fed meeting is so important: It’s not just technical policy adjustments Mr. Powell will talk about, but decisions that will shape America’s economic future.
