The Federal Reserve is slated to raise interest rates for the 10th time in just over a year, as officials continue their fight against inflation amid growing fears of a recession.
At the conclusion of their two-day meeting Wednesday, the central bank is expected to announce a quarter-point hike, which would bring the Fed’s benchmark interest rate to a level between 5 and 5.25 percent.
Policymakers are expected to debate whether this May hike gets interest rates high enough to pause the Fed’s aggressive campaign against inflation and give time for their policies to work through the economy. Or they could decide they have more work to do to raise borrowing costs and curb demand for all kinds of investments, from mortgages to car loans to business hiring.
Complicating the Fed’s decision are the ongoing repercussions from this spring’s banking crisis. Fed officials have said the fallout from the failures of Silicon Valley Bank and Signature Bank will slow the economy. Tremors in the financial system have made banks more reluctant to loan money, curbing demand in a way that mimics an interest rate hike. But policymakers will need to debate – and then explain to the public – just how significant that broader slowdown will be.
“They will surely be thinking hard about how fast the economy is cooling, and the issue about the banking crisis is really front and center in that regard,” said Karen Dynan, a former chief economist at the Treasury Department who is now at Harvard University.
Dynan added that while the bank tumult isn’t expected to alter the Fed’s quarter-point rate hike, “the interesting thing is what they’re going to signal about the future, whether they’re going to change their rhetoric.”
The Fed’s interest rate decision will be announced at 2 p.m. Eastern time. Half an hour later, Fed Chair Jerome H. Powell will appear at a news conference, where he’s likely to get questions on the health of the banking system, the future of rates, expectations for inflation and the odds of a recession.
Last week, the Fed released a scathing report on the failure of SVB – and the Fed’s own culpability – that appeared to set the stage for a major re-strengthening of bank rules, including many that were loosened earlier in Powell’s tenure.
Economic clouds loom over this week’s meeting. On Monday, the Treasury Department warned that the United States could default as early as June 1 if the limit on federal deficit spending isn’t raised by then. The updated deadline comes less than a week after House Republicans adopted a bill coupling an increase in the debt ceiling with spending cuts, defying a veto threat from President Biden. In the past, Powell has warned about the dire economic consequences that would come if the White House and Congress fail to read a deal.
Meanwhile, another regional bank – First Republic – needed to be rescued over the weekend. In a pre-dawn transaction Monday, JPMorgan bought the assets of the failed bank in a move that was intended to end the simmering banking crisis. But it also revived political squabbles over the power of Wall Street’s most powerful banks.
The labor market showed signs of cooling off as job openings – a closely watched measure at the Fed – fell more than expected in March to the lowest level in nearly two years. Layoffs and discharges also jumped, suggesting further weakening in a labor market that has been a remarkable source of strength.
And through it all, inflation is still too high, with consumer prices rising 5 percent in March, compared to the year before. The economy also slowed much more than expected in the first quarter, renewing fears of a recession. At the Fed’s last policy meeting in March, the central bank’s economists also warned of a “mild” recession later this year.
That leaves an extremely difficult job for the Fed, which must make real-time decisions without always having a clear read on the economy. For now, the Fed doesn’t expect to cut rates until next year. But much will depend on how high policymakers decide to hoist rates, when they decide to pause – and whether any new threats roil the Fed’s plans yet again.
“It’s highly uncertain how long the situation will be sustained or how significant any of those effects would be,” Powell said in March, on the heels of the spring bank shock. “So we’re just going to have to watch. … Obviously, at the end of the day, we will do enough to bring inflation down to 2 percent. No one should doubt that.”
(c) 2023, The Washington Post · Rachel Siegel
Source: Matzav