Washington, July 26 (Reuters) – the Federal Reserve is expected to raise interest rates by a quarter of a percentage point on Wednesday, marking the 11th hike in the past 12 U.S. central bank policy meetings and possibly the latest move in its aggressive battle to tame inflation.
The increase, predicted by investors with almost a 100% probability, would raise the benchmark overnight interest rate to the range of 5.25% -5.50%. This would take it to the highest level since the approach to the 2007-2009 financial crisis and the recession.
It makes little sense that a similar collapse is on the horizon. Far from it, the economy is proving more resilient to rising interest rates than expected, with continued growth and an unemployment rate that is currently fixed at a low 3.6%.
In assessing where policy might move next, in fact, the Fed will balance whether the economy remains too strong to return a still-elevated inflation rate to the central bank’s 2% target against evidence that a “disinflation” process may be underway that is likely to continue even without any further rate hikes.
After a rapid series of rate hikes over the past year, with the central bank moving in unusually large leaps three-quarters of a percentage point at one point, policymakers say they are now making meeting-by-meeting judgments based on incoming data, an approach aimed at keeping their options open and one that is likely to be highlighted by Fed Chairman Jerome poimagnell at a press conference shortly after the policy statement was published at EDT (1800 GMT) at 2 p.m.
A key question, said Steve Englander, head of G10 fx research and North American macro strategy at Standard Chartered, is whether the Fed “puts more emphasis on weaker-than-expected inflation or stronger-than-expected activity in setting policy” moving forward.
NEAR THE END
The Fed will not update quarterly economic and interest rate forecasts at this week’s meeting, though policymakers will get a chance to discuss quarterly Bank survey data that has taken on added importance since a string of regional bank collapses earlier this year.
Policymakers ‘ forecasts in June indicated that the Fed is likely nearing the end of its hiking cycle, with most of them seeing the need for only a further quarter-percentage point increase beyond the expected growth on Wednesday.
Data since June, if anything, has lowered expectations that further increases in borrowing costs will be needed, with key inflation data coming in weaker than expected, and information about producer prices and other aspects of the economy suggesting that further moderation is underway. Indeed, as policymakers began their two-day meeting on Tuesday, the Conference Board reported that U.S. consumer 12-month inflation expectations slumped to their lowest level since November 2020.
New data on the Fed’s preferred measure of inflation, the Personal Consumption Expenditures price index, will be released on Friday. A Reuters poll showed economists expect the measure, stripped of volatile food and energy prices, to have risen at an annual rate of 4.2% in June, which would be the lowest since September 2021.
That’s a sharp drop on a data point that has been stuck at around 4.6% since December. But it’s still more than double the Fed’s target, and officials including Yes.
The Fed will have a larger-than-usual amount of data to assess before its next meeting in September. 19-20, about eight weeks away. The typical gap between meetings is six weeks. The longer span allows for a full two months of information on jobs and inflation to be collected, and in this case it will provide two of the first three reports on economic growth in the second quarter.
Reporting By Hoopardi Schneider;
Editing by Dan Burns and Paul Simao
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