WASHINGTON- Federal Reserve officials, increasingly confident they have nipped a potential financial crisis in the bud, now face a difficult judgment on whether demand in the US economy is falling and, if so, whether it is coming down fast enough to lower inflation.
If the US central bank’s policy meeting two weeks ago was dominated by concern that a pair of bank failures risked broader financial contagion – a potential reason to pause further interest rate increases – debate has quickly refocused on whether tighter monetary policy has started to show its impact on the broader economy, or if rates need to rise higher still.
The decision will be a critical one as the Fed plans the final steps in what has been a historic rate hiking cycle, with policymakers still hoping to avoid the sort of deep economic downturn triggered by raising rates too far, but also determined not to do too little and allow inflation to remain high.
The nine rate hikes delivered by the central bank since March of 2022 have pushed the benchmark overnight interest rate from the near-zero level to the current 4.75 percent-5.00 percent range, a tightening pace not seen since Paul Volcker was Fed chair in the 1980s. Consumer and business interest rates have followed suit.
Yet data released on Friday showed the Fed’s preferred measure of inflation was still running at 5 percent annually, more than double the 2 percent target, and projections issued by Fed policymakers on March 22 indicated rates needed to rise a bit more. Also embedded in those projections is the sort of rise in the unemployment rate, from the current 3.8 percent to 4.6 percent by the end of the year, and growth slowdown typically associated with recession, something Fed Chair Jerome Powell and his colleagues still maintain they can avoid.
“It is absolutely a balance … There are uncertainties,” Boston Fed President Susan Collins said in an interview with Bloomberg Television on Friday. “We do need to balance the risk that we don’t do enough … don’t hold the course, and don’t bring inflation down … At the same time I do monitor the data, looking at when we might see the economy turning. … It is early days yet.” – Reuters
