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The Federal Reserve will hold two high-stakes meetings to end the year as it prepares to keep interest rates on hold on Wednesday and delay any further tightening amid mixed signals from the world’s largest economy.
The Federal Open Market Committee is widely expected to keep its benchmark interest rate at a 22-year high on Wednesday, giving the central bank more time to judge progress in bringing inflation back to its 2% target.
The move is the clearest sign yet that officials believe risks to the U.S. economy have become more complex and will face several worrisome developments as they weigh the impact of a campaign to raise interest rates that has begun to dampen economic activity. moon.
Too little is done to deal with price pressures at this stage, and high inflation could become entrenched. Doing too much can put hard-won employment gains in jeopardy.
“A year ago, it was completely clear where we were on one dimension. It was clear that they needed to raise policy rates and they needed to do so aggressively,” said David Wilcox, who headed the Fed’s research and statistics division until 2018. Action.” Judge more carefully whether they are doing enough. “
Even those worried about containing inflation are beginning to worry that monetary policy is becoming too tight—a development that will complicate future policymaking and put the Fed at risk of its next rate-setting meeting, which begins on October 31. becomes unresolved.
Although market participants generally believe the Fed will keep interest rates at the current level of 5.25-5.5% until 2024, nearly half of leading academic economists recently surveyed by the Financial Times expect the Fed to raise interest rates for another 25 months. basis points, and more than 40% predict that the scale will grow twice or more.
As hawkish Fed officials leave the door open to rising borrowing costs — even as they support a slower pace of tightening amid signs of labor market weakness — economists face a thorny question: What would prompt the Fed to resume operations again Tightening monetary policy?
One factor is U.S. consumers, who are spending beyond expectations of a more pronounced economic slowdown — a surprising resilience that could lead to higher prices. Federal Reserve Chairman Jay Powell highlighted this at a central bank symposium in Jackson Hole, Wyoming, last month.
“I think they’re going to raise rates again at some point, just because the underlying inflationary momentum is still greater than we expected at this point in the cycle,” said Kristin Forbes, a former Bank of England official. He now teaches at University College London. MIT.
Other economists believe that for the Fed to further curb demand, consumer spending needs to reaccelerate, not just remain resilient.
Like most economists recently surveyed by the Financial Times, Forbes is concerned about rapidly rising oil and fuel prices.
Central bankers typically scrutinize such commodity price swings, and some economists believe higher gasoline prices will dampen consumer spending elsewhere. But “after you go through periods of volatility and high inflation like this, you have to be more sensitive to these shocks,” Forbes said.
Other factors complicating the Fed’s decision-making process and adding to volatility in the inflation outlook include a strike by auto workers in the Midwest, a potential government shutdown at the end of the month and the resumption of student loan repayments in October.
“We should expect some bumps in the path of inflation, so the key will be how the Fed filters the incoming data and how it affects their 2024 inflation forecast,” said Brian Thacker, former head of the New York Fed’s markets group. .” “At this point, I don’t think we’ve seen anything that would indicate a substantial revision of this.”
Rising short- and long-term Treasury yields and a broader tightening of financial conditions will also help the Fed’s efforts to combat inflation, he added.
Even if the FOMC leans toward no further policy action this year, economists believe Powell is unwilling to rule out the possibility.
“The last thing he wanted to do was create a sense of clarity or certainty that they were done,” said Wilcox, who now works at the Peterson Institute for International Economics and Bloomberg Economics.
The Fed will also release a new set of economic forecasts on Wednesday, including a revised “dot plot” that summarizes individual officials’ forecasts for the federal funds rate.
Even as forecasts for inflation, which excludes volatile food and energy prices, are revised lower, forecasts for year-end growth are also expected to rise. The dot plot is expected to show officials’ support for another 25 basis points of rate hikes this year, and some economists believe it could also show the number of rate cuts in 2024 as the Fed recommits to keeping rates higher for longer. less.
“While things are moving in the right direction, they do have to be wary of anything that might start to lift inflation expectations,” said Fed veteran Peter Hooper, now at Deutsche Bank.
“They fully realize that to accomplish their mission, they must persist with their message until they get closer.”
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