All eyes will be on the Federal Reserve this Wednesday, as a crucial monetary policy meeting concludes in Washington. The outcome will have repercussions for millions of American families and businesses, as well as the economy, ahead of the midterm elections.
For the first time in 22 years, the central bank is expected to raise interest rates by half a percentage point, part of a series of aggressive measures that must be taken to cool the economy amid the worst inflation in 40 years.
In March, the Fed raised its policy rate for the first time since late 2018, raising it by a quarter of a percentage point.
But since then, inflation has continued to rise, hitting a new 40-year high. While the labor market has recovered further, the Fed’s more usual pace of 0.25 percentage point increases may not be enough this time around.
Economists – including some at the Fed – believe the United States is approaching what experts call “maximum employment.” And with the Russia-Ukraine conflict still raging, price pressure on things like food and energy is unlikely to ease anytime soon.
This makes for the perfect cocktail of tight monetary policy.
Even so, investors have already priced in the anticipated rate hike — after Federal Reserve Chairman Jerome Powell said last month that a half-point increase “will be on the table” — so the stock market won’t be shocked by this Wednesday afternoon’s announcement.
The devil will be in the details and guidance of the Fed’s policy-making committee, as well as its plans for its massive balance sheet.
“I expect the Fed to signal that another half-percentage-point increase is likely in its next decision in June, and that additional hikes – likely without details on the number or magnitude – are coming in the second half of the year,” said Bill Adams, Chief Economist at Comerica Bank.
“The Fed wants short-term interest rates to return to a level that is at least neutral – that is, neither adding to nor subtracting from growth – as quickly as possible without causing turmoil in financial markets,” added Adams.
However, it is difficult to say exactly where this neutral level is. It could be around 2.5% or less, according to Adams.
The central bank’s decision will be published at 15:00 GMT, followed by the first in-person press conference with President Powell since the start of the pandemic.
Source: CNN Brasil
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