Federal Reserve Chairman Jerome Powell holds a press conference following the release of the U.S. Fed’s policy decision on interest rates in Washington, May 3, 2023.

Kevin Lamarque | Reuters

After a 10-meeting streak of raising interest rates, the Federal Reserve is expected to take a break on Wednesday to let the US economy breathe.

The markets are prices with high probability that central bank policymakers will “skip” – a term they generally prefer “pause” – at this month’s meeting as they digest the impact of a 5 percentage point hike from March 2022.

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This does not mean that this will be the end of the trips. It just means that with the rate of inflation falling, officials might feel it’s a good time to reassess.

“They put things on hold,” said Bill English, a former Fed official and now a professor of finance at the Yale School of Management. “So they’ll probably pause, but I think they’ll be very keen to avoid an outcome in markets where investors are saying, ‘Hooray! The tightening cycle is over’.”

There will indeed be a lot of moving parts in Wednesday’s Fed action. Here’s a look at what you can expect.


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However, the post-meeting statement could be massaged in a way that markets don’t assume policymakers have gone quiet on inflation and are determined to stop the rate-hike cycle.

“It may be a one-sided communication where they’re leaning toward raising rates, but they’re not ready to commit yet. They want some more information on how things are going,” English said. “The hawkish pause, if you will, is something that could get pretty broad support.

“Dots” and the economic outlook

If a hawkish pause does become the order of the day, it will prompt investors to look at the “dot chart,” a chart of individual members’ expectations about where rates are headed from here.

The general word – reflected in market prices – is that the dots will “move up” and point to another rate hike this year, likely at the 25-26 meeting. July.

When the dots were last updated, at the March meetingThere was a wide disparity among members, with seven of the 18 FOMC members expecting rates to go higher than the current range.

Along with the dots, members will update the Summary of Economic Projections, which outlines the outlook for gross domestic product, unemployment rate and inflation as measured by the personal consumption expenditure price index. Market expectations are that the growth outlook is likely to improve, even though the Fed’s own economists said in March and June that they expected credit to contract trigger a shallow recession later this year.

So the Fed’s message is likely to be: “We’re not convinced this is the end of rate hikes, but we want to look around and see what damage the banking crisis has done to the economy,” said Mark Zandi, chief economist at Moody’s Analytics. “It also recognizes that there is a lag between what we do and when it shows up in the economy and inflation. So we’ll stop here.”

Powell press

After the release of the statement and projections, the chairman of the Fed Jerome Powell will be next to questions from the field and will explain the intentions of the events.

He is widely expected to strike a cautious tone, stressing the importance of reducing inflation rather than focusing too much on the FOMC’s rate hike decision.

“The press conference will probably emphasize that just because we didn’t go hiking at that meeting doesn’t mean we’re done with hiking,” said Dean Maki, chief economist at Point72. “He’ll be very explicit about it. At the same time, I don’t think he wants to pre-commit to a July hike.”

The Fed’s ultimate goal is to strike a balance between being aggressive enough to reduce inflation without stuffing the economy.

History suggests that central banks that pause usually start walking soon after they realize that inflation has not been beaten, according to Goldman Sachs.

“We expect any pauses are likely to be driven by higher inflation surprises rather than tight labor markets, given that the current inflation skirmish remains the main issue central banks are trying to resolve,” Goldman economists Giovanni Pierdomenico and Joseph Briggs said in a note for clients. .

Powell and his colleagues generally expressed confidence that they could control the levers of policy to reduce inflation without causing a recession. But there are no guarantees, and a recession remains the most likely scenario for most economists.

“The risk of continuing to raise interest rates is something that will break more structurally than it has,” said Ed Yardeni, head of Yardeni Research. “Then they would have to cut interest rates if they cause a recession. We’ve had very few periods in the past where the Fed funds rate went up and then stagnated. Usually the Fed overdoes it.”

Correction: At the March meeting, seven of the 18 FOMC members expected rates to go higher than the current range. An error was reported in an earlier version.

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