As the Fed meets, it shares an inflation problem with the world
By Jeanna Smialek
The Federal Reserve today is expected to stop raising interest rates for the first time in 11 policy meetings. But investors are betting that the pause will not last.
The pattern of stopping and then restarting rate increases is becoming well-established around the world. The Reserve Bank of Australia paused its own campaign earlier this year only to raise rates again twice, including last week. The Bank of Canada had left rates unchanged for four months before raising them again in a surprise move June 7.
That’s because inflation is proving stubborn. Across a range of economies, from Melbourne to Munich to Miami, it has been hard to stamp out. Many central banks are contending with price increases that are only moderating slowly, propped up by higher service costs, which include things like concert tickets, rent and hotel rooms.
“Everyone has a kind of similar problem,” said William English, a former Fed staff member who is now at Yale University, noting that policymakers in Britain and the eurozone are facing inflation problems that have a lot in common with the Fed’s. The European Central Bank’s policymakers also meet this week, and they are expected to continue raising rates.
Policy may be tougher to predict in the months ahead as officials try to judge whether interest rates are high enough to ensure that their economies slow enough to restrain price increases.
“We’re into the period where we’re kind of groping a bit,” English said. “It’s going to be a period of considerable uncertainty.”
The Fed has already raised rates sharply over the past 15 months, to just above 5% as of May, and those higher interest rates are trickling through the economy.
In recent speeches, Fed officials have hinted that they could soon “skip” a rate increase to give themselves time to assess the effects of their changes so far, and investors are betting that Fed officials will hold policy steady at their meeting on Tuesday and Wednesday before lifting rates one more time in July. But those forecasts are uncertain: Traders typically have a fairly clear idea of what the Fed might do heading into its meetings, but this time markets see a small but real chance that U.S. central bankers will raise rates this week.
The doubt partly owes to the fact that the Fed will receive an important inflation reading, the Consumer Price Index, on Tuesday. But it also reflects what a fraught time this is for economic policy in the United States and around the world.
This is the worst inflationary episode in America and many of its peer economies since the 1970s and 1980s, so it has been a long time since the world’s policymakers contended with the issue. And while inflation has been fading, it has also demonstrated staying power.
In the United States and elsewhere, inflation started in goods like cars and furniture but has moved into services like airfares, education and haircuts. That’s concerning because price increases for services tend to be driven by broad economic trends rather than one-off supply problems, and can be more lasting.
“Services price inflation is proving persistent here and overseas,” Philip Lowe, the governor of the Reserve Bank of Australia, said in a speech explaining the central bank’s surprise move last week.
Fed officials have been fretting that today’s price increases could prove sticky.
Wage gains remain fairly rapid, which could limit how quickly prices fall as employers try to cover climbing labor bills. And while slowing rent increases should cool overall inflation, some economists have questioned whether that will be enough to steadily lower inflation.
“A rebound in the housing market is raising questions about how sustained those lower rent increases will be,” Christopher Waller, a Fed governor who often favors higher interest rates, said in a recent speech.
At the same time, central bankers want to avoid plunging the economy into a recession that is more painful than necessary.
That is why the Fed may hit pause this week. Officials are aware that monetary policy takes months or years to have its full effect. And recent bank turmoil could further slow down lending and spending, a situation officials are still monitoring.
“Anecdotally, it’s not really that bad — but we don’t have even enough survey data,” said Yelena Shulyatyeva, senior U.S. economist at BNP Paribas. For more evidence, she will be watching a Dallas Fed bank survey this month.
Still, after Australia and Canada increased rates last week, investors asked: Could this mean that the Fed, too, would be more aggressive than expected?
“It is a mistake to make simplistic comparisons,” Krishna Guha, head of the global policy and central bank strategy team at Evercore ISI, said, noting that the Fed still seemed likely to pause in June while teeing up a possible move in July. While the rate increases abroad underscored that inflation is proving sticky globally, he said, that’s no surprise.
“We know that inflation has been frustratingly slow to come down,” he said.