Federal Reserve policymakers are expected to raise interest rates to the highest level in 22 years, while also keeping the possibility of additional increases later in the year. The Federal Open Market Committee (FOMC) is set to announce its decision later today, with Chair Jerome Powell scheduled to hold a press conference following the announcement.
Although investors anticipate a quarter-point increase to the 5.25% to 5.5% range, which would mark the 11th increase since early 2022, they do not expect any further rate hikes in the near future. However, the FOMC had suggested in June that there could be one final hike later this year. It is likely that the committee will approach the decision with caution, as recent softer inflation data may not be enough to convince them that their job is done in terms of controlling inflation pressures.
This potential rate hike in July comes after a pause in June, which was intended to slow the pace of increases as they approach a level believed to be restrictive enough to bring inflation back to the Fed's 2% target. Nevertheless, Powell and his fellow policymakers would want to convey determination to avoid a resurgence of surging prices.
During today's announcement, the FOMC is expected to maintain its guidance suggesting the possibility of "additional policy firming." The committee is also likely to describe the current economic growth as "modest," despite mostly positive economic data leading up to Thursday's release of the gross domestic product (GDP) figures. There may be a debate within the committee regarding whether to acknowledge the recent progress in inflation or to simply state that it remains elevated.
Since the failure of three US banks, the committee has expressed confidence in the stability of the banking industry, describing it as "sound and resilient." With financial stresses having subsided, there may be a discussion about removing that statement as it may no longer be necessary, according to economists at Deutsche Bank.
Powell has been successful in maintaining a strong consensus within the committee, with no dissents recorded since June 2022. It is highly likely that the lack of dissenting opinions will continue during this decision.
During the subsequent press conference, Powell will likely be questioned about the FOMC's forecast for another rate hike, as outlined in the June "dot plot" in the Summary of Economic Projections. This will be in light of the better-than-expected inflation news for June. The focus will be on whether Powell still supports the forecast or if he distances himself from it. Additionally, Powell may be asked to provide his assessment of the latest consumer price reading, which showed a drop in the annual rate of inflation to 3%. If Powell leans towards another rate hike, he may downplay the significance of the favorable report, as the Fed places greater emphasis on a separate measure of inflation, based on personal consumption.
While Powell has expressed confidence in a soft landing, the Fed staff has predicted a US recession, as reported in the minutes of recent FOMC meetings. Given recent signs of a resilient economy, Powell will likely face questions about his views on a potential recession and whether the Fed staff still holds that prognosis.