The Federal Reserve is expected to put a pause on raising interest rates for the first time in 11 policy meetings, but investors are skeptical that it will last. This trend of halting and then resuming rate hikes is taking place globally, with the Reserve Bank of Australia and the Bank of Canada recently raising rates again after pausing earlier this year. The persistence of inflation is the driving force behind this trend, with service costs such as concert tickets, rent, and hotel rooms contributing to moderate and lingering price increases across various economies. Central banks in the eurozone and the UK are also facing similar inflation problems.
Policy prediction is becoming more challenging as officials struggle to determine whether interest rates are high enough to slow their economies enough to control price increases. The US has already raised rates significantly in the past 15 months, and Fed officials are considering skipping a rate increase to evaluate the impact of the rate hikes thus far. However, investors believe that the Fed will hold policy steady at this meeting before raising rates in July.
Inflation has become a persistent issue, not only in the US but around the world. The price increases in goods like cars and furniture have spread to services such as airfares, education, and haircuts. Central bankers are concerned that today’s price increases could prove sticky. Although wage increases remain rapid, which could limit how quickly prices fall, slowing rent increases might not be sufficient to steadily lower inflation. Furthermore, a rebound in the housing market suggests that lower rent increases may not be sustained.
Central bankers are wary of triggering a recession that could be more painful than necessary. Officials are aware that monetary policy takes months or years to have its full effect, and the recent bank turmoil could further slow lending and spending, which they are still monitoring. Yelena Shulyatyeva, senior US economist at BNP Paribas, said there is not enough survey data to gauge the situation. The Dallas Fed bank survey this month may provide more evidence. While Australia and Canada’s recent rate increases underscore that inflation is proving stubborn globally, Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said it would be a mistake to make simplistic comparisons. He added that inflation has been frustratingly slow to come down.
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