After raising rates 10 times in a row, the Fed will keep its benchmark interest rate unchanged for the first time in more than a year, although it expects further hikes later this year.
At the conclusion of its two-day meeting on Wednesday, the FOMC is expected to forego a quarter-point hike and keep the federal funds rate within its current target range of 5% to 5.25%.
A pause in rate hikes would mark the first pause in the U.S. central bank’s aggressive monetary tightening since it first began raising rates in March 2022, opening a new phase in its battle against stubbornly high inflation.
The Fed will also publish an updated “dot plot” collating officials’ forecasts for the federal funds rate through the end of 2025, which is expected to show support for at least another 25 basis point increase this year.
Another rate increase of that magnitude would take the benchmark rate to a new range between 5.25% and 5.5%. The Fed could raise rates again as early as next month, when its policy-setting committee meets again. For that reason, economists said leaving rates unchanged on Wednesday might feel more like a “skip” than a “pause.”
When the dot plot was last updated in March, most policymakers did not expect the central bank to raise rates above current levels, in large part because of stress in the banking sector following the collapse of Silicon Valley Bank and others.
Amid uncertainty about the extent of the credit crunch’s impact on growth and employment, the Fed is facing the tricky task of determining the extent of further squeeze on the economy. Officials are also assessing the cumulative effects of monetary tightening, given that rate hikes will take time to be fully reflected in the real economy.
Federal Reserve Chairman Jay Powell said last month that the central bank has the ability to look at the data and make a “prudent assessment” of the path forward for policy.
Since then, the economic picture has been mixed and has sparked intense debate among officials over whether and when further rate hikes are needed. Economists polled by the Financial Times last week believe the central bank will raise rates at least two times this year, to between 5.5% and 6%.
The latest consumer price index report released on Tuesday showed annual inflation fell even as price pressures persisted across many sectors of the economy. The labor market has lost some momentum, but remains very strong, encouraging consumers to keep spending.
The Federal Reserve is also due to release new inflation, growth and unemployment forecasts on Wednesday. In March, most officials saw “core” inflation, based on the personal consumption expenditures price index, falling to 3.6% this year before easing further to 2.6% in 2024. Currently hovering at 4.7%.
In March, policymakers estimated growth of just 0.4% in 2023 before rebounding in 2024 as unemployment peaked at 4.6%. However, Fed staff took a more pessimistic view, predicting a “mild” recession this year.