The US Federal Reserve is expected to announce a new quarter-point increase in its benchmark lending rate on Wednesday to combat inflation while leaving the door open for further increases in the coming months.
After ten consecutive rate rises, the Fed paused its aggressive monetary tightening campaign last month to give officials more time to analyze the health of the world’s largest economy.
Members of the rate-setting Federal Open Market Committee (FOMC) signaled during their June meeting that they expect two more interest rate hikes this year.
“The forecast is for the Federal Open Market Committee to raise the target range for the fed funds rate by 25bps, but to maintain a bias toward additional rate hikes, if needed,” Oxford Economics’ chief US economist Ryan Sweet wrote in a note to clients.
A rate hike on Wednesday, the 11th since the US central bank began its monetary tightening cycle in March last year, would raise the Fed’s benchmark lending rate to a range of 5.25 to 5.5 percent, the highest level in 22 years.
According to CME Group data, futures traders perceive a nearly 99 percent chance that the Fed will raise interest rates by a quarter percentage point.
Inflation has continued to fall since the Fed’s decision to suspend rate hikes in June, albeit it remains over the Fed’s long-term target of 2%.
Meanwhile, unemployment has remained at historic lows, and economic growth for the first quarter has been sharply revised up due to robust consumer spending data.
The better economic data has boosted the likelihood of a “soft landing,” in which the Fed succeeds in lowering inflation by rising interest rates while avoiding a recession and a jump in unemployment.
Given the near-universal expectation for a raise on Wednesday, analysts and traders will be looking for clues from Fed Chair Jerome Powell about what the central bank might do next.
“They will probably signal that they want to see the impact of the current tightening cycle and that they will probably skip raising rates in September,” said Edward Moya, senior Americas market analyst at OANDA.
“They will almost certainly be explicit in suggesting that additional tightening could very well occur,” he continued.
“Odds are that Powell will signal that additional rate hikes are not off the table,” Sweet said, “but the Fed will take a more cautious approach, conveying that it will skip a hike in September.”
Fed leaders support rate hikes.
Many FOMC members have publicly supported future rises this year, especially if last month’s favorable inflation data is a one-time occurrence.
“Given how far we’ve come, it may make sense to raise rates more gradually,” Powell said at a Congressional hearing following last month’s decision.
A few days later, he told a banking conference in Portugal, “I wouldn’t take, you know, moving to consecutive meetings off the table at all.”
“I see two more 25-basis-point hikes in the target range over the remaining four meetings this year as necessary to keep inflation moving toward our target,” Fed governor Christopher Waller said in mid-July at a banking conference.
While markets have more or less priced in a raise on Wednesday, they are less certain about another hike at the September meeting.
According to CME Group, futures traders currently calculate a likelihood of little more than 20% that the FOMC will hike rates again in September.