26-7-2023 (WASHINGTON) Federal Reserve policymakers are poised to make a significant move by raising interest rates to the highest level in 22 years, while still keeping a tightening bias that indicates the possibility of another increase later in the year.
The Federal Open Market Committee (FOMC) is anticipated to raise rates by a quarter point to the range of 5.25 per cent to 5.5 per cent, marking the 11th increase since early 2022. The decision will be announced at 2 p.m. in Washington, followed by a press conference by Chair Jerome Powell 30 minutes later.
Investors will closely analyze Powell’s remarks to gauge the central bank’s determination to implement another hike in 2023. With inflation pressures showing signs of easing last month, Wednesday’s decision appears highly probable, but market participants don’t expect additional increases, while the FOMC had previously indicated a final hike later in the year.
“They will be leaving all options open,” said Veronica Clark, an economist at Citigroup Inc. “They will certainly remain cautious after only a few months of softer inflation data, which is not enough for them to be convinced that the job is done.”
The July hike follows a pause in June, intended to slow the pace of increases as they approach a level believed to be restrictive enough to bring inflation back to their 2 per cent target over time. Nonetheless, Powell and other policymakers will want to sound resolute to prevent a resurgence of surging prices.
“They want to avoid the mistakes of the 1970s and ’80s when they took their foot off the brake prematurely,” said Kathy Bostjancic, chief economist at Nationwide Life Insurance Co.
“With recent economic data seemingly bolstering the chances of a soft landing, the FOMC is unlikely to rock the boat. Powell will adopt a wait-and-see approach, signaling a skip at the September meeting – a skip that we believe will turn into an extended pause,” said Anna Wong, chief US economist at Bloomberg.
The FOMC statement is expected to maintain its guidance that hints at the possibility of “additional policy firming.” It is also likely to continue describing economic growth as “modest,” despite mostly positive data ahead of Thursday’s gross domestic product release. The committee may debate whether to acknowledge recent inflation progress or simply state that it remains elevated.
During the press briefing, Powell will likely be asked about the FOMC’s June “dot plot” forecast in the Summary of Economic Projections, calling for another hike, given the better-than-expected inflation news in June.
“The question after the meeting is, do they go again?” said Vincent Reinhart, chief economist at Dreyfus and Mellon, who previously spent over two decades working at the Fed. “You listen at this meeting to see how much Powell at the press conference embraces the Summary of Economic Projections or puts some distance in.”
Powell will also be questioned about his assessment of the latest consumer price reading, which indicated a drop to 3 per cent in the annual rate of inflation. If he is inclined towards another hike, he might downplay the significance of a favorable report. The Fed is focusing on a separate measure of inflation based on personal consumption.
While Powell has expressed seeing a narrow path for a soft landing, the Fed staff has predicted a US recession, according to minutes of recent FOMC meetings. With recent signs of a resilient economy, Powell is likely to be pressed on his view and whether the staff still holds the recession outlook.
