The Federal Reserve begins its two-day meeting Tuesday amid signs that inflation is not only resilient but rising again, even as rates hover at their highest levels since 2001.
The central bank is expected to keep rates at 5.25%-5.5%, where they have been since July, but Fed Chairman Jerome Powell’s comments will be especially closely scrutinized. This comes after his speech earlier this month, when he all but dashed hopes of a rate cut anytime soon.
“Right now, given the strength of the labor market and progress against inflation, it is appropriate to give contractionary policies more time to work,” Powell said at the Canada-U.S. Economic Relations Policy Forum in Washington, D.C., adding that if inflation persists, The Fed will “maintain the current level of inflation.” [interest rates] for as long as necessary.”
His prepared remarks at a press briefing after Wednesday’s meeting will likely echo that speech, but the key point to watch will be during the question-and-answer session, JPMorgan economist Michael Feroli said in a note.
While Powell’s earlier comments indicated that he was not considering additional rate increases and had instead limited his options to either keeping rates the same or cutting them, Feroli predicted that further increases would still be a question.
“We believe the press office will not let him off the hook so easily and will push him to do things that will lead to a promotion,” he wrote. “We expect Powell to say that a rate hike is not a base case, but something that will depend on the data and cannot be ruled out.”
The upcoming meeting will also take place without new so-called dot plots of rate forecasts. The latest, in March, showed Fed officials expected three rate cuts this year.
Those hopes have already been dashed by a series of inflation reports that showed no continued cooling, and Feroli said Powell was unlikely to defend the March forecast.
Others on Wall Street also said Powell may have to acknowledge the possibility of raising rates. Bloomberg Economics predicted it would make a “hawkish turn” at the Fed meeting.
“At a minimum, he will likely indicate that the average FOMC participant now expects ‘smaller’ cuts this year. In a more aggressive direction, he could hint at the possibility of no cuts — or even suggest that a raise could be on the table, although not at the current baseline,” wrote Anna Wong, Stuart Paul, Eliza Winger and Estelle Ou.
Bank of America analysts said that until the Fed’s baseline outlook changes, policymakers will give current rates more time to work.
Powell will indicate that the next step (whenever that time comes) will still be to cut rates, they added, while the Fed will remain in a wait-and-see mode until inflation falls further.
For its part, BofA forecasts a rate cut in December and says the bar for rate increases is very high. But it lays out two scenarios in which it would be necessary: if core inflation rises to a point that suggests the economy is overheating, or if expectations for future inflation rise even if current inflation does not accelerate again.
“The longer it remains significantly above 2.0%, the more likely it is that longer-term inflation expectations will rise,” BofA said. “If they do this, the Fed will view it as a loss of confidence and a reason to raise interest rates.”