Federal Reserve officials will conclude their two-day policy meeting on Wednesday afternoon, and while central bankers are widely expected to leave interest rates unchanged, there is an unusual degree of uncertainty about what exactly they will signal about the future.
Officials could stick with their recent script: Their next policy move is likely to be an interest rate reduction, but incoming inflation and growth data will determine how soon reductions can begin and how extensive they will be. But some economists are wondering if the central bank could pivot away from that message, opening the door to the possibility that its next rate move will be an increase rather than a cut.
Inflation has proved alarmingly stubborn in recent months and the economy has retained substantial momentum, which could prod officials to question whether their current 5.33 percent rate setting is high enough to weigh on consumer and business borrowing and slow the economy. Policymakers believe that they need to use interest rates to tap the brakes on demand and bring inflation fully under control.
The Fed will release its policy decision in a statement at 2 p.m. Eastern. But investors are likely to focus most intently on a news conference scheduled for 2:30 p.m. with Jerome H. Powell, the Fed chair.
Here’s what to watch.
The Key Question: How Hawkish?
The key question going into this meeting is how much central bankers are likely to change their tone in response to stubborn inflation.
After three full months of limited progress on lowering inflation, some economists see a small chance that the Fed could signal that it’s open to considering raising interest rates again — a message that Fed watchers would consider “hawkish.” But many think that the Fed will stick with its current message that rates are likely to simply remain set to the current relatively high rate for a longer period of time.
One reason that it might be premature for the Fed to shift their message? While inflation progress has recently stalled, many economists expect price increases to begin to cool again in the months ahead, partly because they expect a key rent measure to slow.
Investors still see little chance that the Fed will have raised rates by the end of the year, and they think it’s most likely that the central bank will cut rates once or twice by December, based on market pricing. But they now see about a one in four chance that officials will not move borrowing costs at all this year.
It’s Unclear How Much Rates Are Hurting.
Mr. Powell is likely to face questions on Wednesday about just how much interest rates are actually weighing on the economy.
Fed officials stopped raising interest rates at the current level because they believed it was high enough to substantially tap the brakes on growth. Officials have now held rates steady at a more than two-decade high since July.
But the economy has held up unexpectedly well in the face of elevated borrowing costs. Hiring has remained rapid, consumer spending is still chugging along, and the economy has generally been expanding at a solid clip. That has caused some analysts to question whether rates are as restrictive as expected.
If rates aren’t squeezing the economy as much as policymakers had anticipated, it could mean that they have to leave interest rates at a high level for longer to slow the economy enough to wrestle down inflation. Or more drastically, it could prod some Fed officials to begin to call for higher rates.
Up until recently, Fed officials have embraced the economy’s surprising resilience because it came alongside cooling inflation. But now that inflation is hitting a roadblock, that confidence could crack.
Markets Will Care About the Balance Sheet.
Investors have been on edge as they anticipate a longer period of high interest rates. The S&P 500 fell about 4 percent during April, its worst showing since September. But Wall Street is also watching another key development: What comes next with the Fed’s balance sheet.
While the Fed’s main policy tool is interest rates, officials also bought bonds in mass quantities in 2020 during the pandemic to soothe troubled markets and to stimulate the economy. They are now shrinking those bond holdings by allowing securities to mature without reinvesting. Policymakers have signaled that they are poised to slow that process soon.
