The Federal Reserve kicks off a two-day policy meeting on Tuesday that is likely to push the U.S. central bank's benchmark overnight interest rate to its highest level in nearly 16 years, hitting a potential plateau that will test the economy in a way not seen since the onset of the financial crisis in 2007.
It will mark the Fed's second straight meeting convened in the aftermath of a major U.S. bank failure, with JPMorgan's Federal Deposit Insurance Corp-brokered takeover of First Republic Bank on Monday the latest evidence that the central bank's historically fast run-up in interest rates is being felt in the financial system and potentially beyond it.
Much remains unsettled. The economy is showing signs of ongoing strength as well as signs of a slowdown. Inflation has been edging down, gradually, with the main price index the Fed watches still more than double the central bank's 2% target. Bank lending has stabilized after a roughly 1.7% drop in mid-March after the failures of Silicon Valley Bank and Signature Bank, but a survey of lending officers to be presented at this week's meeting is expected to signal tighter conditions ahead.
By contrast, when the Fed started tightening policy in June 2004, on the threshold as it turned out of what would become a destabilizing real estate bubble, it moved in "measured" quarter-percentage-point steps from 1% to around 5.25% over two years. A man walks past the Federal Reserve Bank in Washington, D.C., U.S. December 16, 2015. REUTERS/Kevin Lamarque/File Photo
"It usually takes 12 to 18 months for the Fed to soften the labor market and today is no different," he said.With this rate increase, Fed officials will hit a level that will be about 1 percentage point above the rate they consider to have a neutral impact on economic activity. That "restrictive" rate should cause households and businesses to curb spending and hiring, slowing inflation in the process.
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