The Federal Reserve is widely expected to deliver another interest rate hike on Wednesday, resuming its campaign to jack up borrowing costs and crush inflation after a brief pause in June.
The projected quarter-percentage point hike would set the federal funds rate between 5.25% to 5.5%, further restricting economic activity as the borrowing costs for homes, cars and other items march higher.
It would mark the highest rate since 2001 and the 11th increase in nearly a year and a half.
But Wall Street is even more focused on Fed Chairman Jerome Powell’s press conference at 2:30 p.m. ET as they look for additional clues about what comes next in the Fed’s inflation fight. Powell may leave the door open to at least one more rate hike this year, depending on upcoming economic data releases, even amid signs that inflation is continuing to cool.
SILVER LINING OF HIGHER INTEREST RATES: SAVINGS ACCOUNT RATES
“The real importance of the meeting will be what is said in the statement and the press conference after the meeting,” said Dan North, a senior economist at Allianz Trade. “Everyone will be searching for any clues that the Fed has now finished its job and won’t hike anymore. The Fed funds futures market is leaning heavily that way.”
Policymakers are scheduled to meet three more times this year, in September, November and December.
INVESTORS STILL BEARISH ON US ECONOMY AMID SLOWDOWN FEARS
Although investors are betting that this will be the final rate increase in the Fed’s tightening cycle, others are less sure because of the surprisingly resilient economy, which could threaten to refuel inflation.
Against all odds, the labor market has remained very tight. Demand for workers continues to outstrip the number of jobs available. That imbalance could keep wages elevated, leaving companies no choice but to raise prices to offset those labor costs.
“The Fed was lulled into believing that inflation was short-lived in 2021,” said Diane Swonk, KPMG chief economist. “Then inflation reversed course and rose. … They don’t want another head fake by declaring victory too soon; they have already eaten crow on that.”
AMERICANS EXPECT HIGH INFLATION TO STICK AROUND IN LATEST NEW YORK FED SURVEY
Swonk also noted that financial markets, which have been buoyed in recent months by investor hopes the central bank will end the rate hikes, are “front-running the Fed,” which continues to stimulate the economy and risks reflating the economy at a critical juncture.
“That leaves the Fed battling financial markets along with inflation,” she said, adding, “Those who think the Fed will cave to the pressure of financial markets, short of a full-fledged crisis, have not been paying attention to the Fed for the last year. They are not caving.”
Although inflation has eased from a peak of 9.1%, it remains above both the pre-pandemic average and the Fed’s 2% target rate.
Core prices, which exclude the more volatile measurements of food and energy, are also running at a pace more than double the Fed’s goal, pointing to strong underlying price pressures that are still bubbling beneath the surface.
Some Fed officials have already indicated they are supportive of additional rate hikes, given the strength of the economy even in the face of steeper borrowing costs.
“If inflation does not continue to show progress and there are no suggestions of a significant slowdown in economic activity, then a second 25-basis-point hike should come sooner rather than later, but that decision is for the future,” Fed Governor Christopher Waller said this month.
Source: finance.yahoo.com