Fed poised to hike rates as markets anticipate inflation endgame
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[July 26, 2023] By
Howard Schneider
WASHINGTON (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 U.S. central bank's past 12 policy meetings and possibly a
last move in its aggressive battle to tame inflation.
The increase, anticipated by investors with nearly a 100% probability,
would raise the benchmark overnight interest rate to the 5.25%-5.50%
range. That would bring it to roughly the highest level since the
approach to the 2007-2009 financial crisis and recession.
There's little sense a similar collapse is on the horizon. Far from it,
the economy is proving more resilient to rising interest rates than
expected, with ongoing growth and an unemployment rate that is currently
pinned at a low 3.6%.
In assessing where policy may move next, in fact, the Fed will be
balancing whether the economy remains too strong to return a
still-elevated rate of inflation to the central bank's 2% target against
evidence that a process of "disinflation" may be underway that is likely
to continue even without any further rate increases.
After a rapid series of rate hikes over the last year, with the central
bank moving in unusually large three-quarters-of-a-percentage-point
steps at one point, policymakers say they are now making
meeting-by-meeting judgments based on incoming data, an approach meant
to keep their options open and one likely to be emphasized by Fed Chair
Jerome Powell in a press conference shortly after the 2 p.m. EDT (1800
GMT) release of the policy statement.
A key question, said Steve Englander, head of G10 FX research and North
America macro strategy at Standard Chartered, is whether the Fed "puts
more emphasis on weaker-than-expected inflation or
stronger-than-expected activity in determining policy" moving forward.
NEARING THE END
The Fed will not update quarterly economic and interest rate projections
at this week's meeting, though policymakers will have a chance to
discuss quarterly bank survey data that has taken on heightened
importance since a string of regional bank collapses earlier this year.
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The U.S. Federal Reserve building is
pictured in Washington, March 18, 2008. REUTERS/Jason Reed/
Policymakers' projections in June showed the Fed likely nearing the
end of its hiking cycle, with a majority of them seeing the need for
only one further quarter-percentage-point increase beyond the
expected hike on Wednesday.
Data since June, if anything, has lowered expectations that further
rises in borrowing costs will be needed, with headline inflation
data coming in weaker than expected, and information about producer
prices and other aspects of the economy suggesting further
moderation is developing. Indeed, as policymakers began their
two-day meeting on Tuesday, the Conference Board reported U.S.
consumers' 12-month inflation expectations sank to the 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 increased at a 4.2% annual
rate in June, which would be the lowest since September 2021.
That is a significant decline in a data point that has been stuck at
around 4.6% since December. But it is still more than double the
Fed's target, and officials including Powell have said they will not
shift gears on policy until progress on inflation is sustained over
several months and they are convinced the pace of price increases
will return to 2%.
The Fed will have a larger-than-usual amount of data to assess
before its next meeting on Sept. 19-20, some eight weeks away. The
typical gap between meetings is six weeks. The longer span allows a
full two months of information on jobs and inflation to accumulate,
and in this case will also provide the first two of three reports on
economic growth in the second quarter.
(Reporting by Howard Schneider;Editing by Dan Burns and Paul Simao)
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