(Washington) The Fed could announce that it is maintaining its rates at their current level on Wednesday at the end of its meeting, however leaving the door open to possible additional increases, the dilemma still being to slow down inflation without cause the economy to wobble too much.
The meeting of the monetary policy committee (FOMC), which began Tuesday morning, resumed Wednesday “at 9 a.m. (9 a.m. Eastern time) as planned,” a spokesperson for the bank told AFP American center.
It will end at midday on Wednesday. The ingredients seem to be there for the Fed to maintain its rates in the current range, from 5.25 to 5.50%, between inflation which is slowing – despite a recent rebound -, labor shortage about to be resolved, and slowing consumption.
The decision will be announced Wednesday at 2 p.m. (2 p.m. Eastern).
Market participants almost all expect rates to remain stable, according to CME Group’s assessment.
But does this mean that the cycle of rate increases, which began in March 2022 in the face of very high inflation, is over? Or are additional increases expected in the coming months?
The Fed should be careful not to be assertive on this issue, and seems more inclined to be cautious. Indeed, if markets take the end of rates for granted, financial conditions could become less restrictive, and prices could start to rise again.
Ready to take on more if necessary
“The message from the Fed will be that higher key rates will remain on the table until the economy visibly slows and inflation approaches 2%,” comments Steve Englander, head of macroeconomics. American for Standard Chartered and former economist at the Fed, in a note.
“The FOMC will be ready” to raise rates further in the future “if necessary,” he believes.
The press conference that Fed President Jerome Powell will hold, just after the publication of the press release, at 2:30 p.m. (2:30 p.m. Eastern time) will therefore be particularly scrutinized.
As well as updated economic forecasts, in terms of GDP growth, inflation, employment, and changes in rates.
Since March 2022, the Fed’s main key rate has been raised 11 times, a very rapid pace, intended to curb inflation which was at its highest in more than 40 years.
This has since slowed down significantly, despite further acceleration this summer. It stood at 3.7% over one year in August, according to the CPI index.
The Fed favors the PCE index, which it wants to bring back to around 2%, and in July was 3.3% over one year. August data will be released on September 29.
Student loans, strike and shutdown
Another positive signal: the situation seems to be gradually rebalancing on the job market, after two years of labor shortage, which caused wages to soar. The unemployment rate rose to 3.8% in August, due to an influx of new workers, which could help cool inflation.
As for consumption, the engine of American economic growth, it seems to be showing first signs of weakness, after having been vigorous since the start of the COVID-19 crisis, which had contributed to increasing inflation.
And as early as October, millions of Americans will see their purchasing power further reduced, as they will have to start repaying their student loans again, after a two and a half year pause linked to COVID-19.
Furthermore, several clouds hang over the world’s largest economy.
Starting with the unprecedented strike started on Friday by the powerful automobile union, the UAW, among the “Big Three” American manufacturers, GM, Ford and Stellantis (resulting from the merger of the French PSA and the American Chrysler) .
Another threat is that of a “shutdown”, a paralysis of the federal administration, if Republicans and Democrats in Congress do not agree on the government budget by the end of the month.
The Fed’s board of governors is complete for the first time since February, after the departure of former vice-president Lael Brainard, who left to lead the White House economic advisers.
She is replaced by Philip Jefferson, one of the governors of the Fed. And Adriana Kugler, who previously represented the United States at the World Bank, joins the institution, and becomes the first governor of Hispanic origin.