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The Federal Reserve is set to maintain its benchmark interest rate at a 22-year high on Wednesday but signal that it remains willing to tighten monetary policy further as it debates how much more to restrain the US economy.
The Federal Open Market Committee is expected to forgo an interest rate increase following its latest two-day meeting, keeping the federal funds rate between 5.25-5.5 per cent and affirming the US central bank’s strategy to proceed more carefully at such a late stage in its historic fight against inflation.
Since March 2022, the Fed has pursued one of the most aggressive campaigns to choke off consumer and business demand in decades in a battle against price pressures that have proven far more persistent than expected.
The decision on Wednesday will come as the Fed releases a new slate of officials’ individual economic projections, which are expected to show that growth is stronger than predicted in the last projections released in June, as well as broad support for rates to peak between 5.5-5.75 per cent. That translates to one more quarter-point rate rise this year.
But whether the Fed follows through with further tightening is far from guaranteed. Officials are increasingly focused on downside risks facing the world’s largest economy, even as they remain alert to the threat of high inflation becoming entrenched.
Officials are also aware that the impact of months of higher interest rates may only be becoming visible now, such as in the cooling of the US labour market. Fresh headwinds to growth have also emerged, including the resumption of student loan repayments, an unresolved autoworker strike and a looming government shutdown.
Officials are balancing those concerns against data showing that demand across many sectors remains robust, fuelling strong consumer spending and potentially impeding inflation’s fall back to the central bank’s longstanding 2 per cent target.
A surge in oil prices stemming from recent supply cuts has also caused concern, amid fears that it could lift the costs of a broader range of goods and services.
While traders in fed funds future markets broadly believe the Fed will hold rates at current levels until well into 2024, most leading academic economists recently polled by the Financial Times and the University of Chicago’s Booth School of Business thought the central bank had more work to do to beat back inflation.
Most of the economists polled believe one more quarter-point rate rise is in the cards, with another large cohort expecting the Fed to deliver two or more increases of that size. The bulk of the respondents think the Fed will not deliver its first rate cut until the third quarter of next year or later.
