Since March 2022, the US Federal Reserve (Fed) has raised interest rates 10 times in a row from near zero to 5-5.25%, the highest level since mid-2007. The two most recent increases were made after the collapse of four US banks.
In May, Fed Chairman Jerome Powell signaled that the Fed might pause its rate-hike cycle at its June meeting, but left open the possibility of further tightening this year.
The Fed will need to act more aggressively than expected to tackle inflation at its roots, according to a majority of leading economists polled by the Financial Times.
The US central bank's June 13-14 meeting is considered one of the most difficult in its 15-month campaign to control inflation.
“Risk Management”
Now, Fed Chairman Jerome Powell and some of his colleagues want to “pause” to assess the impact of past moves and recent banking failures on credit conditions and the economy, even though a quarterly report showed inflation was still higher than expected three months ago.
“The reason the Fed wants to pause is risk management. There’s a lot of uncertainty and they want to gather more data,” said former Fed Governor Laurence Meyer.
Another reason for the pause in rate hikes is that the Federal Open Market Committee (FOMC) is trying to fight a two-front war. It wants to get inflation back to its 2% target after more than two years, but it also doesn’t want to push rates so high that they overwhelm the economy.
US consumer spending continues to rise despite pressure on prices. Photo: NY Times
The Fed has raised interest rates by more than 5% in less than a year, one of the fastest rate hikes in the US central bank's nearly 110-year history.
“Skipping a rate hike at the upcoming meeting will allow the FOMC to consider more data before making a decision on the extent of additional policy tightening,” Fed Governor Philip Jefferson said on May 31.
So far, the US economy has proven more resilient than many officials predicted in the face of rapid interest rate hikes.
A recent report from the US Labor Department showed that employers added 339,000 jobs in May, nearly double what economists expected, despite higher borrowing costs, persistent inflation and slowing economic growth.
At the same time, the unemployment rate unexpectedly rose to 3.7% from 3.4%, although the labor force participation rate was unchanged in May.
But inflation is not falling fast enough. The US consumer price index (CPI) was 4.4%, and core inflation (which excludes volatile prices such as food and energy) was 4.7% in April, more than double the Fed’s 2% target.
“The Fed’s actions over the past two months have shown that they are more concerned about the risk of a slowdown than about inflation. Inflation data certainly won’t be a let-up for now,” said Anna Wong, chief economist at Bloomberg Economics.
Internal divisions
With inflation still far from target and unemployment near historic lows, policymakers could raise interest rates at least two more times to counter price pressures without slowing growth, according to Ms. Wong.
Several Fed officials, including Chicago Fed President Austan Goolsbee, have pointed to the long-term impact of rate hikes and the potential for widespread tightening of bank credit, recommending that policymakers watch upcoming data carefully.
If supply continues to shrink in the coming months as expected, it would make sense to pause rate hikes, said Jeff Fuhrer, former director of research at the Boston Fed. “I don’t think inflation is going to pick up, because we have excess demand,” Fuhrer said.
But skipping a rate hike in June could make it difficult for Fed officials to restart if needed. To avoid that outcome, Mr. Powell will need to make clear in his post-meeting press conference that more efforts may be needed to reduce inflation.
Some economists say Fed Chairman Jerome Powell has made little progress in fighting inflation. Photo: NY Times
Fed officials are concerned that the public may lose confidence in the Fed's ability to return inflation to 2% if inflation remains above target for much longer.
“The FOMC is increasingly divided. Those who want to skip a rate hike in June want to wait and see whether the 5% rate hikes that have been happening all this time will help cool the economy. Meanwhile, more hawkish members believe that rates are not high enough to curb inflation and that the Fed should not risk falling behind,” economists at Bloomberg Economics said.
According to a survey conducted from June 2-7 of 86 economists, 78 people (more than 90%) said that the FOMC will keep the federal funds rate at 5-5.25% at the end of the meeting on June 13-14. The remaining 8 people said that the interest rate will increase by 0.25%.
More than 30% of the experts in the survey (32 of 86) said the Fed will raise interest rates at least once more this year, including 8 who said it would be in June and 24 who expected it to be in July, after the pause. One predicted that interest rates would increase in both June and July .
Nguyen Tuyet (According to Financial Times, Bloomberg, Reuters)
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