The Federal Reserve is expected to raise interest rates for the eighth time in 11 months at the conclusion of its first monetary policy meeting of 2023 on Wednesday.
But the meeting could also mark a pivotal turning point for the central bank’s decision making: a return to normal.
The Fed is expected to slow the pace of rate hikes to a quarter percentage point, down from a half point in December. That would raise the interest rate that banks charge each other for overnight borrowing to a range of 4.5% to 4.75%, the highest since October 2007. It would also return the central bank to a more traditional, gentler pace of increases after a turbulent period of historically large hikes that upended markets, households and the economy.
Now that inflation pressures have eased in recent months, consumer spending and hiring have slowed, and wage increases have moderated, many analysts believe the central bank could even stop raising rates — and possibly cut them later this year. Others say it’s premature to assume a rate hike pause is on the horizon.
Going the distance
The key question facing Fed watchers this meeting is how the central bank will signal the path forward for the rest of the year. Will Fed Chair Jerome Powell dampen expectations and reiterate that the fight against inflation still has “a ways to go,” or will Fed officials signal that they’re ready to ease up on rate hikes?
Since the last Fed meeting in December, two economic trends have made the case for slowing rate hikes: Recent data on wage growth and inflation have been encouraging and economic growth signals have become concerning. Consumer confidence data indicates uncertainty about the future, and recession fears have risen, especially among CEOs.
That might sound like bad news, but it means that the Fed’s mission to cool the economy and stall price increases is working. In December, Powell outlined how he hopes to win his ongoing fight against inflation: Limit economic growth and rebalance the labor market, which he said would allow inflation to return to a growth rate of about 2%.
Fed officials have said that while they believe they’re on the correct path, they still think there’s a long way to go until they reach their 2% inflation target. The Consumer Price Index shows that while inflation continued to cool in the most recent reading, annual price growth is still at a historically high 6.5%.
“Passing peak inflation is welcome and policymakers appear to have increased confidence that inflation is on a path lower, but the Fed is not yet convinced that inflationary pressures will dissipate quickly,” wrote Bank of America economists in a recent note.
Policymakers are unlikely to declare victory in their inflation fight just yet.
“This first meeting of the year will no doubt be a very interesting one as it will set the tone for the rest of year,” wrote EY Parthenon Chief Economist Gregory Daco in a recent note. “But, rather than a slow waltz, we anticipate an infernal tango as the Fed and markets try to find synchronized rhythms once again.”
The Federal Open Market Committee is expected to announce its latest policy decision on Wednesday at 2 p.m. ET. Fed Chair Jerome Powell will follow the announcement with a press conference beginning at 2:30 p.m. ET.
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