As grocery and gas prices decline, the Federal Reserve is expected to leave the key interest rate where it stands Wednesday, pausing a historic streak of hikes that were meant to slow inflation but also threatened to tip the economy into recession.
Still, as the economy continues to send mixed signals, several forecasters say at least one more hike is likely this year as inflation remains high and job growth continues to be strong.
Fed Chair Jerome Powell has said officials want to assess the delayed effects of the rate increases on the economy as well as the impact of deposit runs that triggered the collapse of three regional banks. The banking crisis, he said, has toughened lending standards and could weaken the economy, leaving less work for the Fed.
Fed decision this week
The Fed’s interest-rate decision is announced at 2 p.m. ET on Wednesday.
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What time does Powell speak today?
Fed Chairman Jerome Powell’s media conference will begin at 2:30 p.m. ET on Wednesday. USA TODAY economics reporter Paul Davidson will cover the event in person.
Current Fed funds rate
In May, the Fed hiked the key rate to a range of 5% to 5.25%, the highest in 17 years. Since the central bank raised the rate from close to zero in March 2022, hikes have been constant, with the Fed boosting the rate nine more times to ease inflation which reached a four-decade high last June in the midst of the COVID-19 pandemic.
Will the Fed cut interest rates?
It’s doubtful that the Fed will cut rates, according to a Vanguard forecast based on a machine learning model. Though markets predict the Fed will clip its rate by more than half a percentage point by the end of 2023 based on bonds and futures contracts prices, Vanguard senior economist Asawari Sathe says that probably will not occur.
“We believe inflation will continue to moderate but remain above 3% through year-end, and unemployment will trend higher to a still reasonable 4.5%,” she said in an investors note. “In that scenario, the Fed cutting its policy rate this year is unlikely.”
Vanguard’s model expects the Fed “won’t be in a position to cut rates until the middle of 2024,’’ according to the note.
What’s the inflation rate?
Consumer prices increased 4% in May, down from 4.9% the previous month, and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly rise since March 2021, and on a monthly basis, prices increased 0.1% following a 0.4% uptick in April.
Though price hikes overall have slowed, the Fed is more anxious about core inflation which stubbornly remains elevated.
Does the Fed plan to raise interest rates again?
While many expect a divided Fed to take a break Wednesday from its stream of rate hikes, economists are struggling to reach consensus on how it will move going forward as the economy remains resilient despite continuing inflation.
Before the release of a key inflation report Tuesday, some thought the central bank might roll out a quarter-point hike if the acceleration of prices was stronger than expected. Others said they believed rate hikes were done for the year.
Barclays predicted the Fed might increase rates again if more than 200,000 jobs were added to the economy last month, and core inflation rose by at least roughly 0.3%.
Employers blew past that hiring threshold, adding a stunning 339,000 jobs in May. And core prices, which don’t count volatile food and energy items and so better reflect longer-term trends, rose 0.4% for the third-straight month, according to the Labor Department’s consumer price index (CPI).
The jobless rate, however, which is calculated from a separate survey of households, bumped up from a five-decade low of 3.4% to 3.7%, according to the Labor Department, the highest it’s been since October. And the annual increase of core prices slipped from 5.5% to 5.3%, the lowest since November 2021.
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Overall, inflation slowed for an 11th straight month in May as grocery-price increases eased again and gas more than reversed the previous month’s rise. Consumer prices rose 4% , down from 4.9% in April and a four-decade high of 9.1% last June, according to the CPI. That’s the smallest yearly uptick since March 2021, and on a monthly basis, prices rose 0.1% following a 0.4% bump in April..
