No Rate Hike Expected from the Fed at Crucial Meeting This Wednesday, with Further Increases Anticipated

Despite having accelerated interest rate hikes at an unparalleled rate over the last 40 years, the Federal Reserve is predicted to hold off on any rate increases this Wednesday for the first time in 15 months. This pause is intended to allow the Fed to assess the effects of its determined effort to combat inflation.

However, leading officials at the Fed have stressed that this break may be short-lived — more of a brief “pass over” — with another potential rate hike anticipated at their next meeting in late July.

Federal Reserve Chair Jerome Powell, along with other senior policymakers, have hinted their intent to evaluate the extent to which a downturn in bank lending might be undermining the economy. As interest rates have escalated, banks have throttled back their lending activity, and the demand for loans has correspondingly dipped.

Some experts have voiced concerns that the collapse of three large banks last spring may trigger apprehensive lenders to drastically reinforce their loan criteria, thereby exacerbating the lending slump. Nonetheless, economists at Goldman Sachs have estimated that the impact of such an event is likely to be minor.

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For the Fed, bypassing a rate increase at this week’s gathering could be the most practical approach for Powell to harmonize a contentious policy committee. The 18 committee members seem divided between those advocating for one or two additional rate increases and those who propose keeping the Fed’s pivotal rate static for a few months to ascertain if inflation continues to ease. This group is wary that overly assertive hikes may escalate the risk of inducing a severe recession.

An official report on Tuesday provided data supporting both viewpoints, with overall price growth significantly slowing yet some aspects of underlying inflation persisting at high levels. Consumer prices overall saw a mild 4% rise in May compared to a year ago, the smallest increase in over two years, and well below April’s 4.9% annual rise.

However, this decrease is largely due to plummeting gas prices and a slowing food inflation. Excluding the unstable food and energy costs, core inflation remains high: Core prices have climbed 5.3% year over year, a slight decrease from 5.5% in April, but considerably exceeding the Fed’s 2% annual goal.

Simultaneously, the steady, gradual decrease in overall inflation suggests that the Fed’s rate hikes are somewhat effective. The central bank has increased its key rate by a significant 5 percentage points since March 2022.

These hikes have resulted in substantially higher expenses for mortgages, auto loans, credit cards, and business loans. The Fed’s objective is to delicately balance slowing borrowing and spending to mitigate growth and control inflation, while avoiding an economic crash.

Data from Tuesday indicates that the rise in core prices was primarily driven by high rents and used car prices, which are expected to decline later this year.

Wholesale used car prices, for instance, dropped in May, suggesting a future decrease in retail prices. Rents are also predicted to moderate in the upcoming months as new leases incorporate smaller price increases. However, these lower prices will take time to be reflected in government measures.

Certain economists propose that if these factors start to decrease and lower core inflation, the Fed might keep its key rate static for the rest of the year. Alternatively, policymakers could opt to raise their key rate one final time in July to around 5.4% and maintain it at that level.

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More about Federal Reserve Rate Hike

• Federal Reserve
• Understanding Interest Rates
• US Inflation Rate
• Current State of the Economy
• Impact of Interest Rate Hikes on Economy