Federal Reserve officials are set to release an interest rate decision on Wednesday afternoon, and while investors widely expect policymakers to raise borrowing costs by a quarter point, they will be watching for any hint of what to expect. what could happen next.
This would be the 10th consecutive interest rate hike by the central bank, culminating in the fastest series of rate hikes in four decades. But it could also be the last from the central bank, for now.
Fed officials signaled in their latest set of economic projections that they may stop raising interest rates once they reach a range of 5 percent to 5.25 percent, the level they are expected to hit on Wednesday. Officials will not release new economic projections after this meeting, leaving economists to pore over both the central bank’s 2:00 p.m. policy decision statement and a 2:30 p.m. news conference. .
Central bankers will balance the mixed signals. They have already done much to slow growth and fight rapid inflation under control, the recent turmoil in the banking industry could dampen demand further, and a looming fight over the debt ceiling poses a new source of risk for the economy. . All of those are reasons for caution. But the economy has been fairly resilient and inflation is showing staying power, which could make some Fed officials feel like they still have work to do.
Here’s what you need to know before Federal Reserve Day.
Inflation has led the Fed to be aggressive
Fed 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 put it down
When the Federal Reserve raises interest rates, it makes it more expensive and often more difficult for families to get loans to buy houses or cars or for businesses to raise money for expansions. That slows down both consumer spending and hiring. As wage growth falls and unemployment rises, people become more cautious and the economy slows further.
If that chain reaction sounds nasty, that’s because it can be: when Paul Volcker’s Fed high interest rates to nearly 20 percent in the early 1980s, helped push unemployment above 10 percent.
But by cooling demand across the economy, a broad-based slowdown can help tame inflation. Businesses find it harder to charge more without losing customers in a world where families spend carefully.
And keeping inflation under wraps is a big priority for the Fed: Price rises have been unusually fast since early 2021, and while they’ve cooled noticeably from a peak of around 9 percent last summer, they’re getting slower. driven by service industries like travel and childcare. Such price increases could prove stubborn and difficult to completely eradicate.
Rates haven’t been this high in over 15 years
To bring price increases back in line, the Federal Reserve raised rates to almost 5 percent, and they are expected to cross that threshold on Wednesday. The last time rates eclipsed 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 translated into a significant slowdown in the real estate market, for one thing. There are also some signs that the labor market, while still very strong, is beginning to weaken: hiring is gradually slowing down and fewer jobs are being created. goes without filling. But perhaps most visible is that higher interest rates are starting to cause financial stress.
Three major US banks have failed, requiring government responses, since early March, culminating in a government-enabled shooting wedding between First Republic and JPMorgan Chase early Monday morning.
Many of the banks under stress in recent weeks have suffered because they did not adequately hedge against rising interest rates, which have reduced the market value of their old mortgages and equity holdings.
Fed officials will need to consider two questions related to the recent turmoil: Will there be more drama as other banks and finance companies struggle with higher rates, and will the banking problems so far slow the economy significantly?
Mr. Powell could give the world a glimpse of his thinking at his press conference.
Economists are on patrol pause
Between the bank turmoil and how much the Fed has already raised interest rates, investors are hoping the authorities will stop after this move. But don’t assume that means the slowdown is over.
The Fed’s higher rates are like a delayed-reaction drug: They start working quickly, but take time to show their full effects. Movements from last year are still filtering through the economy, and by leaving rates on hold at a high level, officials could continue to weigh on the economy for months to come.
And it may be that central bankers aren’t really stopping: some have suggested that if inflation remains rapid and growth maintains its momentum, they could raise interest rates further. But it seems possible, even likely, that the bar for future rate moves will be higher.
The United States is on recession alert
As high rates and banking problems hit, many economists think the country could hit an economic downturn. Fed staff economists even said at the central bank’s March meeting that they thought a mild recession was likely later this year as a result of the banking crisis, according to minutes from the last Fed meeting. .
Mr. Powell will surely be asked about that at this press conference, and he may have to explain how the Fed hopes to prevent a small recession from becoming a big one.
A mild slowdown would likely feel much different to people on the ground than a major downturn. One would mean slightly fewer job opportunities, more moderate wage growth, and less bustling businesses. The other could involve job loss and insecurity, reduced hours and wages, and a general sense of gloom among American consumers.
That’s why the Fed meeting on Wednesday is important: It’s not just about the technical policy adjustments that Mr. Powell will be talking about, but about the decisions that will shape the economic future of the United States.