US Federal Reserve officials are expected to announce another steep rate hike on Wednesday to prevent rising inflation from taking hold, but politicians are stepping up the pressure in the final days of midterm elections.
The Federal Reserve has embarked on an aggressive campaign to cool the economy this year as inflation has soared to the highest level in decades, American families’ budgets have been squeezed and economic issues have become top voter priorities.
To increase the cost of borrowing and reduce demand, the central bank has raised the benchmark interest rate five times this year, including three consecutive hikes of 0.75 percentage points.
Many analysts are expecting the Fed to hike a fourth straight quarter-point hike on Wednesday, and all eyes are on signs that it could turn to a less hawkish stance in the coming months.
“There is growing belief that the central bank will signal a desire to ease the brakes in subsequent meetings,” Craig Erlam, senior market analyst at Oanda, said in a note.
However, it will be a challenge for Fed Chair Jerome Powell to tell markets that the policy-making Federal Open Market Committee (FOMC) has started considering a step back from its current stance.
“Markets are likely to interpret any comment about a tightening cut as dovish, signaling the end of the tightening cycle,” High Frequency Economics economist Rubeela Farooqi said in an analysis.
And if inflation remains strong, the Fed could go ahead with “a series of half-point hikes rather than further slowing the pace of hikes,” she added.
With deliberations concluding at noon, the FOMC is expected to announce its decision at 18:00 GMT on Wednesday.
Powell’s post-meeting press conference will be closely watched for clues as to how far he thinks the Fed needs to go before declaring victory in the inflation war.
– Political pressure –
As central bankers walk a tightrope to fight inflation while avoiding plunging the economy into recession, politicians are increasing pressure on Fed officials amid growing fears of a slowdown.
Senator Sherrod Brown, the Democratic chair of the Senate Banking Committee, last month urged the Fed to show its commitment to its multifaceted legal mandate — promoting maximum employment, stable prices and moderate long-term interest rates in the economy.
“For working Americans, who are already feeling the pressure of inflation, losing jobs will make it a lot worse,” Brown said in a letter to Powell.
Democratic senators, including Elizabeth Warren, also expressed concern about Fed rate hikes this week as President Joe Biden’s party faces growing voter frustration over high inflation.
“It may be too late to avoid a recession, but the Fed has made it very clear from the start that while a soft landing is the desirable and achievable outcome, controlling inflation is the primary goal,” Oanda’s Erlam said .
With higher interest rates blunting economic momentum, there is likely to be “a slowdown in the labor market before a mild recession in (the first half of) 2023 brings more marked changes,” Oxford Economics economist Matthew Martin said in an analysis.
