WASHINGTON: After a pause in June, the US central bank is widely expected to raise interest rates again on Wednesday, adopting the tightest monetary stance in 22 years, despite recent signs of slowing inflation.
After 10 consecutive hikes in just over a year, the Fed last month halted an aggressive monetary tightening campaign to give policymakers more time to assess the health of the US economy and the impact of recent banking pressures on lending conditions.
In the coming weeks, positive improvements in economic growth and cooler inflation data boosted the likelihood that the Fed’s rate-setting committee will vote for a quarter-percentage-point hike on July 25-26.
That would raise the federal funds rate to a range between 5.25 percent and 5.5 percent — the highest level since 2001.
“If I had to bet, I’d bet they’ll raise the Fed funds rate by 25 basis points at the next meeting,” Joseph Gagnon, senior fellow at the Peterson Institute for International Economics (PIIE), told AFP.
“The economy is cooling slowly,” Bank of America Chief Economist Michael Gapen wrote in a recent note to investors.
“We believe that most members of the committee believe that further rebalancing of supply and demand is needed to ensure that disinflation continues,” he added, explaining why he expected another hike on Wednesday.
According to CME Group, futures traders now assign a more than 99 percent chance that the Fed will raise its key rate by 25 basis points at its next meeting.
While a July rate hike is now widely expected, the question remains how far the Fed will have to go this year to bring inflation back to its long-term target of two percent.
The risk of recession is disappearing
Since the Fed’s decision to pause in June, its favored rate of inflation has slowed to less than four percent year-on-year, while unemployment has remained near record lows.
Economic growth was also sharply revised upward for the first quarter on stronger-than-expected consumer spending.
Positive economic news raised the chances of a so-called soft landing, in which the Fed manages to reduce inflation by raising interest rates while avoiding a recession and rising unemployment.
“We see the line between a mild recession and a soft landing as increasingly fine, and the likelihood of the latter outcome is undeniably on the rise,” Deutsche Bank economists wrote in a recent note to clients.
Goldman Sachs recently cut the probability of the US economy entering a recession in the next 12 months to 20 percent from 25 percent, although it remains slightly above the average of post-war levels.
“Recent data has strengthened our confidence that reducing inflation to an acceptable level will not require a recession,” the bank’s chief economist Jan Hatzius wrote in a note to investors.
Hiking in September?
At their June meeting, Fed officials said they expected two more quarter-percentage-point increases this year to tackle inflation.
With the first interest rate hike widely expected on Wednesday, analysts have focused on what the Fed will do next.
Some economists are predicting another rate hike as soon as the next Fed meeting in September, while others believe it could keep rates flat again.
“My sense is that even if they’re going to move slowly, 25 basis points a meeting or even every other meeting, I don’t think they’re going to stop,” said PIIE’s Joseph Gagnon.
With uncertainty surrounding September, Fed Chairman Jerome Powell’s press conference after the rate decision will be closely scrutinized for any indication of what the US central bank might do next.
“At the press conference, we’re looking for Chairman Powell to better clarify what indicators the committee should be seeing to move comfortably into the expanded cargo space,” Morgan Stanley economists wrote in a recent note to clients.
