Analysts expect the US Federal Reserve to pause interest rate hikes on Wednesday as the central bank looks to tame inflation while avoiding a recession, despite a recent energy-fueled rise in consumer prices.
After 11 interest rate hikes since March last year, inflation has fallen sharply but remains stuck stubbornly above the Fed's long-run target of two percent per year -- keeping pressure on officials to consider further policy action.
Despite rising slightly due to increased energy costs, inflation remains well below last year's peak, while economic growth remains robust and the unemployment rate sits close to record lows -- raising hopes the Fed can slow price increases without triggering a downturn.
Fed policymakers launched their second day of deliberations Wednesday morning, ahead of the 2:00 pm (1800 GMT) publication of the interest rate-setting Federal Open Market Committee's decision, along with its updated economic forecasts.
"We look for the FOMC to keep its target range for the federal funds rate unchanged," Wells Fargo economists wrote in a recent note to clients, adding that "most market participants" expected the Fed to hold rates steady.
The Fed's rate decision will be followed half an hour later by a press conference with Fed Chair Jerome Powell, which will be closely watched for hints on the path of future rate decisions.
"Chair Powell will acknowledge recently softer inflation and lower job openings, but emphasize vigilance given remaining upside risks to inflation," economists from Citi wrote in an investor note published Wednesday.
- Sitting tight -
If the Fed proceeds as expected, it will hold its key lending rate at its current range between 5.25 and 5.50 percent -- a 22-year high.
Traders currently see it as 99 percent likely that the FOMC will hold off on hiking interest rates on Wednesday, and have assigned a roughly 70 percent chance it will vote to do the same at its next meeting in November, according to data from CME Group.
Policymakers are looking to keep the country on what Chicago Fed President Austan Goolsbee calls the "golden path," attempting to slow down inflation while averting a surge in unemployment and a major economic slowdown.
"If you look at expectations in the marketplace, there's a growing confidence that we can pull it off," he said during a recent interview broadcast on NPR.
But Goolsbee added that the Fed must remain "attentive to the data," echoing Powell, who has promised to follow a "data-dependent" path going forward.
Analysts at Goldman Sachs recently cut their expectation of a recession in the United States from 20 percent down to 15 percent, while other economists -- including those in the Fed's research team -- say they no longer expect the US economy to contract this year.
- Revision to growth -
Alongside its interest rate decision, the Fed will also publish updated forecasts for a range of economic indicators, from inflation to growth, as well as with FOMC members' expectations of future interest rate policy.
Analysts will be closely analyzing these forecasts for signs of whether policymakers continue signaling they expect interest rates to rise higher than current levels -- as they did in June -- and for how long they think rates should remain high to bring inflation firmly back down to target.
They also expect the Fed to significantly raise its economic growth forecast for 2023 from its last update in June due to stronger-than-expected economic output.
"The SEP is likely to undergo meaningful revisions, particularly in 2023," Deutsche Bank economists wrote in a recent investor note, adding they expect the growth forecast for this year to double from one percent to two percent.
"The Fed's GDP growth projections are likely to be revised higher and the unemployment rate forecast revised lower in the near term, to reflect the resilience of the economy since the July meeting," Oxford Economics' Chief US Economist Michael Pearce wrote in a recent note to clients.
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