Is it a ‘skip’ or a ‘pause’? Federal Reserve won’t likely raise rates next week but maybe next month

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Federal Reserve Chair Jerome Powell will be confronted with an escalating disagreement among committee members at their meeting next week. Some Federal Reserve officials prefer to halt the unbroken series of rate hikes after ten consecutive increases, to evaluate whether these hikes are indeed suppressing inflation.

On the other hand, another faction insists that inflation is still too elevated and that the Fed should persist with at least one or two more rate increases starting as early as next week.

How will Powell manage to reconcile these viewpoints? By converting what would typically be termed a “hold” into a “delay”. While a “hold” could mean that the Fed might not raise its primary rate again, a “delay” suggests it probably will – just not right away. Powell, in his press conference next week, is expected to indicate that the central bank’s principal rate might continue to rise.

There’s a possibility the Fed could hint at a future rate hike through its quarterly economic forecast. This could involve projecting a quarter-point rise in their primary rate by the year’s end – around 5.4%, higher than their March prediction. Such a move would imply the next week’s decision isn’t as much a “hold” as it is a “delay”.

According to Matthew Luzzetti, Deutsche Bank Securities’ chief U.S. economist, such a strategy may be the only way to maintain unity among committee members amidst the increasing divergence of their views.

For over a year, the Fed’s rate-setting committee, comprised of 18 members, has shown strong unanimity in their advocacy for rapid rate hikes to control a surge in inflation to a 40-year peak. The policy makers have boosted the rate by a significant 5 percentage points within 14 months – a record pace of increase in 40 years, hitting a 16-year high. They anticipate that the consequential tighter credit conditions will rein in spending, temper the economy, and curtail inflation.

However, there is a growing concern among some Fed officials that the current rates have reached a level sufficient to hinder hiring and growth. They fear that further rate increases may potentially induce a severe recession, thereby creating a chasm in the committee regarding the next course of action.

One faction, referred to as “doves”, is against another rate hike. The doves believe it takes over a year for the full effects of a rate hike to manifest, thus suggesting the Fed should halt the rate hikes, at least temporarily, to study their impact.

However, the opposing “hawkish” group argues in favor of additional rate hikes. Despite reductions in food and gas prices, they point out that overall inflation is stubbornly high, hiring remains robust, and consumer spending is increasing — all of which could sustain high prices.

The “doves” currently seem to hold sway. Powell expressed his endorsement for a “hold” on May 19, and President Joe Biden’s nominee for the Fed vice chair, Philip Jefferson, has also voiced his support for a pause, which is likely to be temporary.

In the last forecast in March, seven Fed officials indicated their preference to push the primary rate to roughly 5.4% or higher by 2023-end. If three more members adjust their projections upwards next week, that could be sufficient to increase the median estimate by a quarter-point.

However, should only two officials raise their predictions, the committee would be split equally on whether to increase rates later this year, possibly causing confusion about future actions.

Nevertheless, any delay in rate hikes may be temporary. Between the Fed meeting next week and the subsequent one in July, only one more employment report and one inflation report will be released. Therefore, when the Fed reconvenes in July, inflation is expected to remain high with strong hiring, and the “hawks” could possibly win another rate hike.

Frequently Asked Questions (FAQs) about Federal Reserve Rate Hikes