Will the Fed raise interest rates at its next meeting?
Nothing is clear yet, but continued high inflation is causing the Federal Reserve to rethink how to manage interest rates in the coming months. This leaves the outlook for Federal Reserve policies more uncertain than at any time in the past since it launched a series of 10 consecutive rate hikes starting in March 2022.
Many Fed watchers expected central bank officials to abandon another rate hike when they next meet in mid-June. However, recent warnings from many officials about the ongoing threat of rising inflation suggest that this outcome is uncertain.
Last Friday, Fed Chairman Jerome Powell gave a clear signal that he is open to halting interest rate hikes at the central bank’s next meeting on June 13-14.
Speaking at a Federal Reserve conference in Washington, he said: “We have come a long way in tightening monetary policy, and the stance of the monetary policy is restricted. We also face uncertainty about the delayed effects of the rate hike and about the extent of credit tightening resulting from recent banking pressures.”
Reading the prepared notes, Powell added: “Now that we’ve come this far, we can afford to monitor the data and the evolution of the forecasts, to make accurate assessments.”
“The financial stability tools helped to calm conditions in the banking sector. Developments there, on the other hand, are contributing to tighter credit conditions and are likely to weigh on economic growth, hiring and inflation,” he said as part of a panel on monetary policy.
“So as a result, our policy rate may not need to rise as much as it would have otherwise to achieve our goals,” he added. “Of course, the extent of that is highly uncertain.”
The Fed raised interest rates by 25 basis points earlier this month to a target range of 5 percent to 5.25 percent and hinted they may pause tightening monetary policy.
Powell’s carefully prepared comments were preceded by a stance by Dallas Federal Reserve Chair Lorie Logan, who said on Thursday she believed economic data so far did not support a pause in rate hikes by the central bank next month.
Read: ECB increases Eurozone interest rate in effort to stabilize economy
In written notes to the Texas Bankers Association, Logan said: “Economic data due in the coming weeks could show that the rate hike can be stopped, but the current situation does not allow it.”
On inflation, she said, “We haven’t made the progress we need to make.”
Logan explained that consumer prices, especially excluding energy and food prices, are not falling fast enough to stop raising interest rates, while the labor market is still suffering from labor shortages leading to continued wage increases.
Federal Reserve member Philip Jefferson said Thursday that he would prefer to hold rates steady at next month’s meeting and be patient to assess the impact of previous rate hikes.
He pointed to the conference of the National Association of Insurance Commissioners in Washington to the belated effects of monetary policy and the ambiguity surrounding tight lending standards.
“History says that monetary policy decisions emerge after long periods and that a year is not enough time to demand the impact of interest rate increases” on the economy or inflation, Jefferson said.
Atlanta Federal Reserve President Rafael Bostic also warned that the Fed is willing to keep interest rates high to bring inflation down to its 2 percent target, even if unemployment begins to rise steadily.
Official economic data released earlier this month showed that the inflation rate in the United States declined in April, compared to its level in the previous month, which gives the Federal Reserve an opportunity to stop the series of interest rate increases in the coming months.
According to the U.S. Department of Labor, the consumer price index rose last month by 4.9 percent year-on-year and by 0.4 percent month-on-month, driven by the continued rise in housing prices.
Core inflation, which excludes food and energy prices, was 0.4 percent per month. This is the same rate recorded in the previous month. On the other hand, the annual core inflation rate fell to 5.5 percent last month from 5.6 percent in March.
Is there a cut?
Despite this uncertainty about the Fed’s next steps, no Fed official went so far as to suggest that the Fed is likely to cut interest rates this year.
But financial markets continued to bet that monetary policymakers would feel compelled to cut interest rates twice by the end of 2023. Will that happen?
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