The Fed will leave interest rates unchanged but...

Federal Reserve The United States began a two-day meeting on Tuesday during which officials are widely expected to leave interest rates unchanged for now but also signal in new economic forecasts whether they believe interest rates should rise further before the end of the year.

The new statement and decision on interest rates will be published today at 20:00 p.m. Polish time, and at 20:30 p.m. Fed Chairman Jerome Powell will discuss the details at a press conference.

Rates will remain unchanged

Investors in contracts linked to the federal funds rate consider it almost certain that the U.S. central bank will leave the benchmark federal funds rate in its current range of 5,25%-5,5%, a step consistent with a shift to a slower and more deliberate pace of rate increases . From March 2022 to May 2023, the Fed raised interest rates at 10 consecutive meetings to combat the worst rise in inflation since the early 80s.

The Fed held off on increases in June, but quarterly economic projections accompanying that decision showed that 12 of 18 policymakers still expect two more quarter-percentage-point rate increases by the end of the year.

One of them took place at the July meeting. While slower, "data-dependent" Fed's pace could prompt officials to skip September

There has been little in recent economic news that would cause policymakers to abandon the latest rate hike. Additionally, data since the last Fed meeting, while broadly supporting the view of slowing inflation amid continued economic growth, has been somewhat mixed due to the recent sharp increase in the pace of major price increases.

Since the July meeting "the situation continued... that most participants still perceived a significant risk of inflation growth" – quoting the minutes of this meeting. Although inflation has declined from its peak last year, fundamental measures show prices are still rising at a rate about twice the Fed's 2% target.

Risk is skewed

Policymakers, and Powell in particular, are also reluctant to make any concessions in the fight against inflation, even if it means higher interest rates than expected and greater risks to an economy that has created more jobs and greater economic growth than expected given the rapid tightening of policy money.

The higher Fed rate causes banks and financial companies to also raise their own rates on mortgages, business loans, credit cards and many other types of financing - discouraging household investment and spending and, through this reduction in demand, lowering inflation.

Closing the door on further interest rate increases could now lead to a looser overall financial conditions as markets price in a lower interest rate trajectory, the opposite of what the Fed would like when there is no certainty that inflation was stopped.

The outcome of today's meeting could already involve a difficult shift in communications as the Fed manages an approach that sees a likely end to interest rate increases - if policymakers raise rates again, it will likely be at the November meeting - and a transition to a time next year when they will likely start lowering rates. interest rates as a way to synchronize with lower inflation.

The revised economic forecasts are expected to show more progress on prices this year and next, causing the inflation-adjusted "real" interest rate to gradually rise unless the interest rate itself is lowered at the same time.