On the heels of a 10-meeting streak of raising interest rates, the Federal Reserve on Wednesday is expected to take a break and let the U.S. economy catch its breath.
Markets are pricing in a high probability that central bank policymakers will "skip" — an expression they generally prefer to "pause" — at this month's meeting as they digest the impact of 5 percentage points worth of increases going back to March 2022.
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That doesn't mean this will be the end of the hikes. It just means that with the pace of inflation waning, officials could feel this is a good time to evaluate.
"They've kind of set things up for a pause," said Bill English, a former Fed official and now a finance professor at the Yale School of Management. "So they'll probably pause, but I think they'll very much want to avoid an outcome in markets where investors say, 'Hurrah! The tightening cycle is over.'"
Indeed, there will be a lot of moving parts in Wednesday's Fed action. Here's a look at what to expect.
Rates
If the rate-setting Federal Open Market Committee does choose to pause, that will leave the benchmark borrowing rate in a target range between 5% and 5.25%.
In the market's eyes, Tuesday's consumer price index report, which showed the 12-month inflation rate falling to a two-year-low of 4%, cemented that decision.
However, the post-meeting statement could be massaged in a way that markets don't assume that policymakers have gone quiescent on inflation and are set on halting the rate-hiking cycle.
"This could be a one-sided communication that they're leaning in the direction of raising rates, but they're not ready to commit just yet. They want some more information on how things are going," English said. "A hawkish pause, if you like, is something that could get pretty broad support."
The 'dots' and the economic outlook
If a hawkish pause indeed becomes the order of the day, that will send investors looking to the "dot plot," a chart of individual members' expectations of where rates are headed from here.
The general chatter — reflected in market pricing — is that the dots will "move up" and indicate an additional rate hike this year, likely at the July 25-26 meeting.
The last time the dots were updated, at the March gathering, there was a wide disparity among where members stood, with seven of 18 FOMC members expecting rates to go higher than the current range.
Along with the dots, members will update the Summary of Economic Projections, which lists the outlook for gross domestic product, the unemployment rate and inflation as gauged by the personal consumption expenditures price index. Market expectations are that the growth outlook likely will improve, even though the Fed's own economists said in March and June that they expect a credit contraction to trigger a shallow recession later this year.
Communication from the Fed, then, likely will be, "We're not convinced that this is the end of the rate hikes, but we want to take a look around see what kind of damage the banking crisis has inflicted on the economy," said Mark Zandi, chief economist at Moody's Analytics. "It also recognizes that there's a lag between what we do and when it shows up in the economy and inflation. So we're just going to pause here."
The Powell presser
After the statement and projections are released, Fed Chairman Jerome Powell will be up next to field questions from the press and explain the intentions behind the actions.
There's wide expectation that he'll take a cautious tone, emphasizing the importance of bringing down inflation rather than focusing too much on the FOMC deciding to pass on a rate hike.
"The press conference is likely to emphasize that just because we did not hike at a given meeting, that does not mean that we're done hiking," said Dean Maki, head economist at Point72. "He will be very explicit about that. At the same time, I don't think he wants to pre-commit to a July hike."
Finding the balance between enough aggression to bring down inflation while not tanking the economy is the Fed's ultimate goal.
History suggests that central banks that pause usually commence hiking soon after they discover that inflation hasn't been vanquished, according to Goldman Sachs.
"We expect that any pauses will likely be driven by upside inflation surprises rather than tight labor markets given that the current inflation overshoot remains the main problem that central banks are trying to solve," Goldman economists Giovanni Pierdomenico and Joseph Briggs said in a client note.
Powell and his colleagues generally have expressed confidence that they can control the levers of policy to bring down inflation without causing a recession. But there are no guarantees, and a recession remains the most likely case for most economists.
"The risk in continuing to raise interest rates is something will break more structurally than it has so far," said Ed Yardeni, head of Yardeni Research. "Then they would have to lower interest rates if they cause a recession. In the past, we've had very few periods where the fed funds rate went up then plateaued. Usually, the Fed overdoes it."
Correction: At the March gathering, seven of 18 FOMC members expected rates to go higher than the current range. An earlier version misstated a figure.