Federal Reserve policymakers, increasingly certain they have averted a financial disaster, must decide if U.S. economic demand is declining and how fast.
Suppose the U.S. central bank’s policy meeting two weeks ago was dominated by concern that a pair of bank failures risked broader financial contagion, a potential reason to pause further interest rate increases. In that case, the debate has quickly shifted to whether tighter monetary policy has started affecting the economy or if rates need to rise.
As the Fed considers the last stages in a record rate-increasing cycle, officials hope to prevent a major economic slump caused by raising rates too much, yet don’t want to do too little and let inflation rise.
Since March 2022, the central bank has raised the benchmark overnight interest rate nine times, tightening it to 4.75%-5.00%. Consumer and business interest rates followed.
On Friday, the Fed’s favored inflation gauge was still running at 5% yearly, more than double the 2% objective, and Fed officials’ March 22 predictions indicated rates needed to climb further. Under such estimates, the unemployment rate rises from 3.8% to 4.6% by year’s end, and GDP slows, something Fed Chair Jerome Powell and his colleagues still believe they can prevent.
“It balances… Uncertainties exist, “Bloomberg Television interviewed Boston Fed President Susan Collins on Friday. “We must balance the danger of not doing enough, not holding the course, and not lowering inflation. I also watch the data for signs of an economic turnaround. Early days.”
This week, Richmond Fed President Thomas Barkin echoed. “Inflation remains high. Job availability remains scarce “told reporters. “Rate hikes can accelerate economic decline. Inflation might rise without rate hikes.”
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