The Colorado Springs Gazette final

A ‘skip’ or a ‘pause’? Fed likely won’t raise rates next week

WASHINGTON • Don’t call it a “pause.”

When the Federal Reserve meets next week, it is widely expected to leave interest rates alone — after 10 straight meetings in which it has jacked up its key rate to fight inflation.

But what might otherwise be seen as a “pause” will likely be characterized instead as a “skip.” The difference? A “pause” might suggest that the Fed may not raise its benchmark rate again. A “skip” implies that it probably will — just not now.

The purpose of suspending its rate hikes is to give the Fed’s policymakers time to look around and assess how much higher borrowing rates are slowing inflation. Calling next week’s decision a “skip” is also a way for Chair Jerome Powell to forge a consensus among an increasingly fractious committee of Fed policymakers.

One group of Fed officials would like to pause their hikes and decide, over time, whether to increase rates any further.

But a second group worries that inflation is still too high and would prefer that the Fed continue hiking at least once or twice more — beginning next week. A “skip” serves as compromise. When the Fed chair speaks at a news conference next Wednesday, he will likely make clear that the central bank’s key rate — which has elevated the costs of mortgages, auto loans, credit card and business borrowing — may eventually go even higher.

The clearest signal that a skip, rather than a pause, is in the works will likely be seen in the

quarterly economic projections that policymakers will issue Wednesday. Those may show that officials expect their key rate to rise a quarter-point by year’s end — to about 5.4%, above their estimate in March.

“That’s probably the only way to keep the committee cohesive in an environment where they have seem to have somewhat broadening disagreements,” said Matthew Luzzetti, chief U.S. economist at Deutsche Bank Securities.

For more than a year, the Fed’s 18-member rate-setting committee has presented a united front: The officials were nearly unanimous in their support for rapid rate hikes to throttle a burst of inflation that had leapt to the highest level in four decades. (The committee has 19 members at full strength; one spot is now vacant.)

The Fed raised its rate by a substantial 5 percentage points in 14 months — the fastest pace of increases in 40 years, to a 16-year high. The policymakers hope that the resulting tighter credit will slow spending, cool the economy and curb inflation.

The rate increases have led to sharply higher mortgage rates, which have contributed to a steep fall in home sales. The average rate on a 30-year mortgage has nearly doubled, from 3.8% in March 2022 to 6.8% now. Compared with a year ago, sales of existing homes have tumbled by nearly a quarter.

Credit card rates have also climbed higher — topping 20% on average nationwide, up from 16.3% before the Fed’s rate hikes began. Many consumers have had to bear the weight of that costlier cost credit card debt.

Auto loans have grown more expensive, too. The average rate on a five-year loan has jumped from 4.5% early last year to 7.5% in the first three months of this year.

Several Fed officials contend that rates are already high enough to slow hiring and growth and that if they go much higher, they could cause a deep recession. This concern has left policymakers deeply divided about their next steps.

The camp that’s leaning against another rate increase is considered “dovish,” in Fed parlance.

The doves, who include Powell and other top officials, think it takes a year or more for rate hikes to deliver their full effect and that the Fed should stop hiking, at least temporarily, to evaluate the impact so far.

The more dovish officials also worry that this spring’s banking turmoil, with three large banks collapsing in two months, might have compounded the brake on economic growth by causing other banks to restrict lending. Raising rates again too soon, they feel, could excessively weaken the economy.

The doves also think that pausing rate hikes to ensure that the Fed doesn’t go too far might help achieve the tantalizing prospect of a “soft landing.”

This is the hoped-for scenario in which the Fed would manage to tame inflation without causing a recession, or at least not a very deep one.

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2023-06-08T07:00:00.0000000Z

2023-06-08T07:00:00.0000000Z

https://daily.gazette.com/article/281973202052076

The Gazette, Colorado Springs