Federal Reserve poised to implement another quarter-point rate rise

The Federal Reserve is set to deliver a quarter-point rate rise on Wednesday in what will be its 10th consecutive increase in just over a year, as pressure builds on the US central bank to call time on its aggressive monetary tightening campaign.

At the end of its two-day gathering, the Federal Open Market Committee (FOMC) is expected to raise its benchmark policy rate to a new target range of 5 to 5.25 per cent, the highest level since mid-2007.

The meeting comes at a fraught moment for the US economy and financial system as midsized lenders continue to be clobbered after a series of bank failures.

First Republic on Monday became the third bank to be seized by US regulators in the past two months, with the Federal Deposit Insurance Corporation brokering a hasty takeover by JPMorgan. That followed emergency measures that government authorities took in March, just days before the last Fed meeting, to stem contagion after the implosion of Silicon Valley Bank and Signature Bank.

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Officials on Wednesday must confront the challenge of balancing a potential credit contraction stemming from the banking turmoil against the fact that inflation remains stubbornly high and price pressures are moderating only gradually.

Meanwhile, the Fed is under mounting political pressure. In a letter on Tuesday, 10 Democratic lawmakers called on Jay Powell, the Fed chair, to refrain from further rate rises, warning that more increases could “trigger a recession, throw millions out of work and crush small businesses”.

Fed policymakers are not expected to box themselves in by ruling out further rate rises. However, most economists think the increase on Wednesday will be the last of this cycle, especially after the Fed’s own staffers soured on the outlook and started forecasting a recession this year.

In March, the FOMC signalled that “some additional policy firming may be appropriate”, a softening of the guidance that had been in place since March 2022, when the central bank said there was a need for “ongoing increases”.

Most Fed watchers expect the Fed to stick to its most recent language or to make modest changes.

Others think the Fed might reprise phrasing last used at the tail-end of its 2006 tightening campaign, when it said “the extent and timing of any additional firming...will depend on the evolution of the outlook for both inflation and economic growth”. --Copyright The Financial Times Limited 2023