With the Federal Reserve steaming toward another interest rate hike this week, policymakers face a choice over how much weight to put on recent economic data that has made hoped-for outcomes on inflation and unemployment seem more likely while also posing a risk the economy is too strong to keep prices in line.
Since the U.S. central bank's policy meeting in June, inflation has slowed more than expected towards the Fed's 2% target, with many analysts arguing a cycle of moderating price hikes is underway and should continue without further rate increases beyond the quarter-percentage-point hike broadly expected to be announced on Wednesday.
The rate-setting Federal Open Market Committee is expected to lift its benchmark overnight interest rate to the 5.25%-5.50% range when it releases its latest policy statement at 2 p.m. EDT on Wednesday. Fed Chair Jerome Powell will hold a press conference shortly after to elaborate on the decision.In the six weeks since their June 13-14 meeting, Fed policymakers have digested data offering a mirror image of what they faced a year ago.
Signs of a slowdown are there, to be sure, and some policymakers expect more weakness is coming - an argument for caution in considering further rate increases. The change crossed a significant line, moving from just below the Fed's 1.8% estimate of trend growth - and a level that should thus continue to temper inflation - to significantly above it. The first estimate for second-quarter gross domestic product will be issued on Thursday, with economists anticipating a 1.8% rate of growth versus 2.0% in the first quarter.
That will likely keep the door open to more rate increases - for now. U.S. central bankers were caught out in 2021 when their initial analysis of rising inflation attributed it to forces, like a supply shock and pandemic-era spending, that they thought would pass with time. Even if that now appears to be happening two years later, they'll likely be slow to take the win.
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