Federal Reserve officials are set to release an interest rate decision on Wednesday afternoon, and while investors widely expect policymakers to lift borrowing costs by a quarter-point, they will be watching carefully for any hint at what might come next.
This would be the central bank’s 10th consecutive interest rate increase — capping the fastest series of rate increases in four decades. But it could also be the central bank’s last one, for now.
Fed officials signaled in their last set of economic projections that they might stop raising interest rates once they reached a range of 5 percent to 5.25 percent, the level they are expected to hit on Wednesday. Officials will not release fresh economic projections after this meeting, which will leave economists carefully parsing both the central bank’s 2 p.m. policy decision statement and a 2:30 p.m. news conference with Jerome H. Powell, the Fed chair, for hints at what comes next.
Central bankers will be balancing conflicting signals. They have already done a lot to slow growth and wrestle rapid inflation under control, recent tumult in the banking industry could curb demand even more, and a looming fight over the debt ceiling poses a fresh source of risk to the economy. All of those are reasons for caution. But the economy has been fairly resilient and inflation is showing staying power, which could make some Fed officials feel that they still have work to do.
Here’s what to know going into Fed day.
Inflation has prompted the Fed to get aggressive
Fed policymakers are raising interest rates for a simple reason: Inflation has been painfully high for two years, and making money more expensive to borrow is the main tool government officials have to get it down.
When the Fed raises interest rates, it makes it more expensive and often more difficult for families to take out loans to buy houses or cars or for businesses to raise money for expansions. That slows both consumer spending and hiring. As wage growth sags and unemployment rises, people become more cautious and the economy slows further.
If that chain reaction sounds unpleasant, it’s because it can be: When Paul Volcker’s Fed raised interest rates to nearly 20 percent in the early 1980s, it helped to push joblessness above 10 percent.
But by cooling demand across the economy, a widespread slowdown can help to wrestle inflation under control. Companies find it harder to charge more without losing customers in a world where families are spending cautiously.
And getting inflation under wraps is a big priority for the Fed: Price increases have been unusually rapid since early 2021, and while they have cooled off notably from a peak of about 9 percent last summer, they are increasingly driven by service industries like travel and child care. Such price increases could prove stubborn and difficult to fully stamp out.
Rates haven’t been this high in more than 15 years
To get price increases back in line, the Fed has raised rates to nearly 5 percent — and they are expected to cross that threshold on Wednesday. The last time rates eclipsed 5 percent was the summer of 2007, before the global financial crisis.
What does it mean to have interest rates this high? More expensive mortgages have translated into a meaningful slowdown in the housing market, for one thing. There are also some signs that the labor market, while still very strong, is beginning to weaken — hiring is gradually slowing, and fewer jobs are going unfilled. But perhaps most visibly, the higher interest rates are starting to cause financial stress.
Three big U.S. banks have failed — and required responses from the government — since early March, culminating in a government-enabled shotgun wedding between First Republic and JPMorgan Chase early Monday morning.
Many of the banks under stress in recent weeks have suffered because they did not adequately protect themselves against rising interest rates, which have reduced the market value of their older mortgages and securities holdings.
Fed officials will need to consider two issues related to the recent turmoil: Will there be further drama as other banks and financial companies struggle with higher rates, and will the bank trouble so far significantly slow the economy?
Mr. Powell could give the world a sense of their thinking at his news conference.
Economists are on pause patrol
Between the banking upheaval and how much the Fed has lifted interest rates already, investors expect policymakers to pause after this move. But don’t assume that means the slowdown is over.
Higher Fed rates are like delayed reaction medicine: They start to kick in quickly, but their full effects take a while to play out. Last year’s moves are still trickling through the economy, and by leaving rates on hold at a high level, officials could continue to weigh down the economy for months to come.
And it could be that central bankers will not actually pause: Some have suggested that if inflation remains rapid and growth keeps its momentum, they could raise interest rates more. But it seems possible — even likely — that the bar for future rate moves will be higher.
America is on recession watch
As high rates and bank problems bite, many economists think the country could be in for an economic downturn. Economists on the Fed’s staff even said at the central bank’s March meeting that they thought a mild recession was likely later this year in the aftermath of the banking crisis, based on minutes from the Fed’s last meeting.
Mr. Powell is sure to get asked about that at this news conference — and he may have to explain how the Fed hopes to keep a slight recession from turning into a big one.
A gentle slowdown would probably feel a lot different for people on the ground than a major recession. One would involve slightly fewer job opportunities, milder wage growth and less boisterous business. The other could involve job loss and insecurity, slashed hours and earnings, and a pervading sense of glumness among American consumers.
That’s why Wednesday’s Fed meeting matters: It’s not just technical policy tweaks Mr. Powell will be talking about, but decisions that will shape America’s economic future.