(Bloomberg) -- Federal Reserve officials look set to moderate interest-rate increases again, with Chair Jerome Powell keeping further hikes on the table while leaning against bets they will cut later this year.
The policy-setting Federal Open Market Committee is widely expected to raise rates by 25 basis points at the conclusion of its two-day meeting Wednesday, bringing its benchmark to a target range of 4.5% to 4.75%. The move would be another downward step for officials, who increased rates by 50 basis points in December, following four 75 basis-point hikes last year.
With no update at this meeting to their economic projections, Fed officials will rely on their statement and Powell's press conference to hammer home the message that their work is not done.
"Where there is a market disconnect is that the Fed keeps saying over and over again — and these are doves and hawks alike — that the policy rate is likely to stay at peak for quite some time," said Ellen Zentner, chief US economist for Morgan Stanley.
The decision will be announced at 2 p.m. in Washington and the chair will speak to reporters 30 minutes later.
Recent economic reports suggest price pressures are easing and growth is cooling – all signs that the US economy is responding to the Fed's aggressive rate increases as policymakers work to tame inflation. But a still-tight labor market could add more pressure on the Fed to extend its tightening campaign or hold rates at restrictive levels for longer.
Data released earlier on Wednesday showed vacancies at US employers unexpectedly increased at the end of 2022. The Labor Department's Job Openings and Labor Turnover Survey, or JOLTS, reported that the number of available positions climbed to a five-month high of just over 11 million in December from 10.4 million a month earlier.
Peak Near?
Policymakers say they think rates need to get above 5% and then stay there to give the higher borrowing costs time to travel through the economy.
One thing to watch for is whether Powell refers to Fed forecasts released in December, which showed that officials saw rates rising to a median of 5.1% this year, as an accurate measure for where they see rates headed now, said Jonathan Pingle, the chief US economist for UBS Group AG.
There may be clues in how Powell talks about recent inflation data, which showed that prices are cooling faster than officials expected. The personal consumption expenditures index rose by 5% in December from a year earlier, the slowest pace since 2021 but still well above the Fed's 2% target.
"They're getting incrementally more confident that inflation is peaking, but I think it's much too soon" to signal that a pause is near, said Pingle.
'Ongoing Increases'
Speculation that the peak rate is close is leading to questions about whether it is time for the Fed to adjust the wording in its statement that says "ongoing increases" in rates will be appropriate.
Some see policymakers risking an overly dovish signal to markets if they adjust the statement while also stepping down to a smaller rate increase.
"If you soften that, you're probably sending a signal that your terminal rate, your anticipated terminal rate is lower than it was in December or you're a lot nearer to the terminal rate than you were before," said Michael Gapen, head of US economic research for Bank of America Corp. "I don't think they want to communicate that."
However, officials may have more flexibility if they use wording that says some "further increase" in the target range would be appropriate, which could be read as meaning one more, or several more rate increases, said Zentner of Morgan Stanley.
Some Time
Some economists are watching for the Fed to formalize the forward guidance policymakers have been verbalizing in public remarks for months now – that rates will stay at restrictive levels for "some time."
Adding those intentions to the statement would send a hawkish message to markets and push back further against expectations that the Fed will cut rates in the second half of this year.
Furthermore, keeping rates at high levels for a time allows the central bank to discretely keep tightening policy because interest rates will become more restrictive in real terms as inflation comes down, even after the Fed stops hiking, Zentner said.
Financial Conditions
Financial conditions are the loosest they've been since last February as investors bet declining inflation will allow the central bank to stop hiking soon and then cut rates later this year. But those conditions, including rising stocks and bonds, could work against the Fed's efforts by fueling more spending.
Fed officials have mostly held off from discussing financial markets, but minutes from the central bank's December meeting showed policymakers are concerned about their "unwarranted easing."
"The biggest puzzle is how they are going to react to the relative loosening in financial conditions since the December meeting," said Thomas Costerg, senior US economist at Pictet Wealth Management, who expects that the Fed will need to raise rates again in March and May. "I personally don't think that hammering the message that the Fed will go past 5% is enough to get the tightening in financial conditions that the Fed desires."
Debt Ceiling
Powell could be asked about the negotiations happening in Washington over the debt ceiling and how the US economy could suffer if lawmakers fail to reach a deal. The uncertainty over the debt limit also has potential consequences for the Fed's efforts to shrink its balance sheet by adding more volatility to the pace at which reserves are being drained from the banking system.
The Fed chief is likely to stay out of the political fray, but he could offer insight on what metrics officials are watching to ensure that reserves do not fall too low.
Several policymakers, including New York Fed President John Williams, have recently said the balance-sheet runoff is so far running as planned. Williams said he is watching developments closely and expects that the cash being parked at the Fed's reverse-repurchase facility, which sees take-up of about $2 trillion a day, to act as a "buffer" for markets as reserves decline.
--With assistance from Steve Matthews and Molly Smith.
(Updates with JOLTS data in seventh paragraph.)
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