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

by Ethan Kim
Federal Reserve Rate Hike

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.

Frequently Asked Questions (FAQs) about Federal Reserve Rate Hike

What is expected to happen at the Federal Reserve’s meeting on Wednesday?

It’s expected that the Federal Reserve will not raise interest rates at the meeting on Wednesday. This will be the first time in 15 months they have chosen to maintain the current rates.

What has led to the predicted pause in the Federal Reserve’s rate hikes?

The pause is intended to allow the Fed to assess the effects of its aggressive efforts to combat inflation over the past 15 months.

When is the next potential rate hike after this meeting?

Top officials at the Fed have hinted that the next potential rate hike could be as soon as their next meeting in late July.

What concern has been expressed by some analysts regarding bank lending?

Some analysts have expressed concern that the recent collapse of three large banks could cause lenders to tighten their loan qualifications, thereby exacerbating the decline in lending.

What are the effects of the Fed’s rate hikes on the economy?

The rate hikes have led to increased costs for mortgages, auto loans, credit cards, and business borrowing. The goal of these hikes is to slow borrowing and spending to mitigate economic growth and control inflation. However, this needs to be done delicately to avoid triggering a recession.

What are the expectations for the future key rate?

Some economists suggest that the Fed might keep its key rate unchanged for the rest of the year, while others think there might be one final increase in July to around 5.4%.

How are inflation and the consumer prices expected to change?

While overall inflation is steadily declining, some elements of core inflation, excluding volatile food and energy costs, remain high. However, certain costs driving the core prices, such as rents and used car prices, are expected to ease later in the year.

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MikeLovesEcon June 14, 2023 - 1:56 pm

Didn’t expect them to pause the rate hikes, but I guess it makes sense. They’ve been pushing hard to tackle inflation, now it’s wait and see, right?

SarahJaneInvests June 14, 2023 - 2:07 pm

well that’s a relief, my mortgage has been killing me. might just catch a break now!

BennytheBanker June 14, 2023 - 4:48 pm

Honestly im more worried about the lending slump. if banks tighten up too much could really impact the economy.

PollyPolicyWonk June 15, 2023 - 3:03 am

it’ll be interesting to see what happens in July. One more hike or a hold for the rest of the year? guess well have to wait and see…

ThriftySaver June 15, 2023 - 3:31 am

Guess it’s about balancing act, too aggressive with hikes and we risk recession, too lax and inflation keeps soaring. tricky times for the Fed.

CarFanatic99 June 15, 2023 - 3:57 am

Who else is watching those used car prices? fingers crossed they do go down like predicted!


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