A pause expected at Wednesday's meeting
U.S. central bankers gather this week to decide whether to lift interest rates a second time this year in an effort to bring inflation down. Most economists and Wall Street analysts anticipate that the benchmark rate will stay where it is, in a range of 3.75% to 4%, when the policy statement is published on Wednesday. The announcement is set for 2 p.m. ET.[S1][S2][S3]
The Fed last moved in September, adding a quarter of a percentage point — its first increase in three years — which pushed up borrowing costs throughout the U.S. economy. According to CME Group's Fed Watch tool, which derives probabilities from 30-day Fed funds futures prices, traders assigned an 88% chance to a hold this month and a 71% chance to an increase in December. No meeting is scheduled for November.[S1]
Inflation still running above target
Consumer prices have climbed sharply this year. Headline inflation across the U.S. rose in September as energy costs jumped, while core inflation, which strips out volatile energy and gas categories, was up 2.6% from a year earlier — a sign that price pressures may be spreading through the wider economy. The Fed aims for annual inflation of 2%.[S1]
Gasoline prices, which have stayed above $4 a gallon for three months, were responsible for more than half of the September rise in consumer prices, the Labor Department reported. Many Americans have voiced frustration with the cost of gas, food and other expenses as they prepare to vote in the midterm elections on Nov. 3.[S1]
December move remains in play
In quarterly projections released last month, the rate-setting committee indicated it expected to raise rates again later this year, and most economists and investors expect one more increase before year-end, likely at the final meeting of the year on Dec. 8-9. Some policymakers, however, have made clear the central bank feels no hurry to lift borrowing costs further.[S1]
In a recent research note, Capital Economics senior North America economist Thomas Ryan observed that Fed officials would likely be troubled by the recent strong inflation figures and climbing inflation expectations, yet they still seemed generally committed to tightening policy gradually. After the September rate increase, New York Fed President John Williams said in a University at Buffalo speech that the move made urgency unnecessary and left room to collect additional information.[S1]
Fed Chairman Kevin Warsh will hold a press conference after this week's decision. Investors are unlikely to get clues from him beforehand, since he has argued against sharing forward guidance on rate decisions.[S1]
