WASHINGTON — Federal Reserve officials are widely expected to raise borrowing costs by a quarter of a percentage point on Wednesday, the 10th straight rate hike since March 2022. But investors and economists believe this could be the last move. of the central bank before pausing.
Fed officials face a difficult backdrop ahead of this week’s meeting: risks to the financial system are significant, but inflation also remains stubborn.
The banking system has been in crisis since the collapse of Silicon Valley Bank on March 10. Government officials spent last weekend racing to find a buyer for First Republic, which had been struggling for weeks and was sold to JPMorgan Chase in an early announced deal. Monday in the morning.
Part of the turmoil in the banking sector stems from the Fed’s rapid interest rate hikes over the past year. Central bankers are expected to raise rates to just over 5 percent this week, up from near zero in March 2022. After that rapid series of adjustments, many lenders are facing losses on older, rate-paying securities and loans. relatively low interest rates. compared to newer securities issued in a world with higher rates.
Despite the moves by the Federal Reserve, which were aimed at curbing accelerating inflation by slowing the economy, the job market has maintained some momentum and price increases have shown worrying staying power. Businesses continue to hire at a solid pace, and data released last week showed wages continued to rise rapidly at the start of the year. While inflation has slowed, it is being increasingly driven by service price increases that have shown little sign of cooling off, which could make it harder to fight price increases all the way back to normal. slow and steady target of the Federal Reserve.
The policymakers will give the public an idea of how they are thinking about the tense economic moment on Wednesday in their post-meeting statement at 2 p.m. will look to a press conference with Fed Chairman Jerome H. Powell at 2:30 p.m. for clues as to what comes next.
The Fed could hint at a pause
When Fed policymakers released their economic estimates in March, they expected to raise interest rates to a range of 5 to 5.25 percent in 2023.
If officials tighten policy as expected this week, they will have raised rates to that level. The question now is whether they consider that sufficient, or whether policymakers think the economy and inflation are resilient enough that they need to adjust borrowing costs further to cool things down and bring inflation down altogether.
Powell could offer some signal during his press conference, or he could choose to leave the Fed’s options open, which is what some economists expect.
“They don’t need to rule anything out,” said Blerina Uruci, chief US economist at T. Rowe Price. “The worst case scenario for them would be to signal that they are done and then have the data force them to do a U-turn.”
investors expect Fed officials will stop after this week, hold rates steady for a few months, and then start cutting them, perhaps substantially, to a 4.5 to 4.75 percent range by the end of the year.
However, Fed policymakers have insisted that they do not expect to cut rates imminently. And some have hinted that further increases could be warranted if inflation and economic strength show staying power.
“Monetary policy needs to tighten further,” Christopher Waller, Fed governor and one of the most inflation-focused central bankers, said in a statement. a speech of april 14. “How much more will depend on incoming data on inflation, the real economy and the degree of credit tightening.”
Banking turmoil will influence policy
Fed officials have made it clear that turmoil in the banking system could slow the economy, but policymakers don’t know by how much.
Banking problems are different from other types of business problems, because banks are like yeast in the sourdough that jump-starts the economy: if they’re not working, nothing else grows. They lend money to potential home buyers, people looking to buy new cars or add garages, and businesses looking to expand and hire.
It’s pretty clear that banks are going to withdraw their lending at least a little bit in response to the recent turmoil. Anecdotal signs are already emerging across the country. The question is how sharp that change will be.
“If the response to recent banking problems leads to financial tightening, monetary policy needs to do less,” Austan Goolsbee, president of the Federal Reserve Bank of Chicago, said in a statement. April 11 speech. “It’s not clear how much less.”
He noted that private sector estimates suggested the hit to growth from the banking turmoil could be equivalent to rate hikes of one to three-quarters of a point. That estimate came long before the First Republic’s demise, but after its troubles began.
The resilience of the economy will be critical
A big question for the Federal Reserve, and one that will be important to everyone, is whether the US economy will survive this episode without sinking into a painful recession.
Fed staff members told the central bank’s March meeting they expected the economy to experience a “mild recession” in the wake of the recent banking turmoil. And Fed officials, including Mr. Powell, have suggested a recession is possible as officials try to slow the economy enough to control inflation.
But if a recession hits, it’s not obvious how painful it will be. Some economists warn that recessions usually build on themselves, as people respond to a bit of economic weakness by cutting spending a lot: It can be hard to raise the unemployment rate just a little without raising it significantly.
Others point out that the post-pandemic economy is a strange one, characterized by unusually strong corporate profits and many job openings. Because there may be room to narrow margins and trim vacant positions, the economy may cool more gently than in the past, known as a “soft landing.”
Mr Powell will have an opportunity to weigh in on which outcome he believes is most likely on Wednesday.