Fed Poised to Hold Interest Rates Steady, With Future Increases on the Horizon

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The Federal Reserve is poised to leave interest rates unchanged in its upcoming decision, marking the first time since March 2022 that the U.S. central bank refrains from tightening its monetary policy. However, this move should not be mistaken for a complete halt or change in direction.

As the Fed concludes its two-day meeting, policymakers are expected to convey that further rate hikes may still be on the horizon. The decision to hold rates steady is driven by a cautious approach to the economy, which is weighed against persistent concerns about inflation.

"We recognize the need for some tightening, but the degree remains uncertain," commented Blerina Uruci, Chief U.S. Economist at T. Rowe Price Associates. Despite positive employment and core inflation reports, a more nuanced analysis suggests that both indicators could weaken in the future. Given this uncertainty, a cautious approach is deemed appropriate by Uruci.

At 2 p.m. EDT (1800 GMT), the Fed will release its policy statement and quarterly economic projections, followed by a press conference led by Fed Chair Jerome Powell 30 minutes later.

While the Fed is likely to abstain from raising borrowing costs, they are expected to convey through their language and projections that one or possibly two additional quarter-point hikes may be necessary by the end of 2023.

The data since the previous Fed meeting in May has presented a complex picture, leaving room for interpretation and debate among policymakers. The labor market continues to exhibit strength, with robust job and wage gains. However, inflation remains a concern as certain inflation measures persistently exceed expectations. The Personal Consumption Expenditures Price Index, excluding food and energy, has shown limited improvement this year and is currently increasing at an annual rate of 4.7%, more than double the Fed's 2% target.

On the other hand, forward-looking indicators suggest that inflation could decelerate significantly in the coming months. Additionally, the unemployment rate experienced a notable increase from 3.4% to 3.7% in May, and bank lending growth has slowed down, warranting the Fed's careful monitoring of potential stress in the financial industry.

The expected policy outcome reflects a compromise, driven by the uncertainty surrounding the current economic landscape. Fed officials concerned about a potential economic slowdown are given a six-week interval until the July meeting to assess the situation further. Meanwhile, officials worried about persistent inflation readings know that the central bank is prepared to raise rates if price pressures do not abate.

It is crucial to note that this decision does not signify a prolonged pause in rate hikes or an anticipation of rate cuts in the near future. The Fed's most recent quarterly projections indicate that the benchmark overnight interest rate is expected to remain relatively stable until the end of 2024, aligned with the anticipated decline in inflation. A significant shift towards looser policy is not projected until 2025, when the policy rate is expected to decline more than inflation, indicating a true "pivot" in monetary strategy.

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