Federal Reserve officials are anticipated to maintain interest rates unchanged during their Wednesday meeting. This will give them more time to evaluate whether borrowing costs are sufficiently high to dampen the economy and control inflation.
Investors will be more focused on the policymakers’ statements about the future rather than their actions on Wednesday. They will closely monitor whether Fed officials still anticipate another interest rate increase by the end of the year or if they are approaching the next phase of combating rapid inflation.
Having already raised interest rates to the highest level in 22 years, central bankers aim to slow demand across the economy, making it harder for companies to raise prices without losing customers. In their previous economic forecast released in June, officials predicted one more rate increase by the end of 2023. However, key policymakers have recently shown less intent on making another move.
Fed Chair Jerome H. Powell had previously hinted at further adjustments and suggested that policymakers might raise rates “if appropriate.” After their meeting this week, Fed officials will release economic projections that will provide insight into whether most policymakers still believe another rate increase is necessary and how they interpret the current state of the economy.
While there is a chance that officials will still forecast another rate move, there is also a possibility that they will consider the current setting as the peak interest rate. However, even if the Fed signals that rates have reached their peak, officials have made it clear that they are likely to remain elevated for some time to continue cooling the economy gradually.
According to Michael Feroli, chief U.S. economist at J.P. Morgan, many centrist Fed officials have expressed that they are close to achieving their goals. Feroli believes there is a two-thirds chance that policymakers will still forecast another rate move while a one-third chance that they will consider the current rate as the peak.
The revised forecasts, along with the Fed’s statement and a news conference with Powell, might provide the clearest indication yet of how close the central bank is to the end of rate increases and what the next phase of tackling inflation might entail. However, Feroli does not expect officials to start discussing rate decreases just yet.
The Fed will also release interest rate projections for 2024, 2025, and 2026 after this meeting. If stocks were to rise and anticipate an earlier Fed-induced squeeze, it could make borrowing cheaper and stimulate the economy, which contradicts the Fed’s aim to slow it down.
Despite the Fed’s high rates, the economy has shown resilience. Consumers and companies have maintained healthy spending levels, likely due to factors such as pandemic savings, a strong labor market, and government policies promoting investment. This resilience may lead to a revision of the Fed’s economic forecasts.
While inflation has cooled down, policymakers may be cautious about fully eliminating inflation in a robustly growing economy. They may believe that a more substantial economic slowdown is needed to bring inflation down to their 2 percent target.
William English, a former Fed economist and current Yale professor, is skeptical that the Fed can achieve a full disinflation without a more significant economic slowdown. He believes the Fed’s base case is still a period of slow growth before inflation is fully controlled.