The Federal Reserve is set to announce on Wednesday whether it will impose another interest rate hike, the latest move in a month-long battle by the central bank to lower inflation but risk the US slipping into recession.
The Fed has raised borrowing costs as it tries to slow price increases by slowing the economy and reducing demand. However, this approach puts the US economy at risk of recession and millions of people out of work.
At its December meeting, the Fed raised its short-term lending rate by a half-percentage point, pulling back from three consecutive 0.75% hikes and showing confidence that sky-high inflation can be moderated.
Economists expect the Fed to continue to soften its stance with a 0.25% rate hike on Wednesday.
The decision comes weeks after a government report showed inflation slowed in December, marking six straight months of price increases.
Consumer prices rose 6.5% in the year ended December, a significant slowdown from the summer peak but three times the Fed’s target inflation rate of 2%.
Cooled inflation has fueled optimism that the US economy can avoid a recession. In a report on Monday, the International Monetary Fund predicted that US economic growth would slow this year but that the US could still avoid a recession.
Federal Reserve Board Chairman Jerome Powell speaks during a press conference at the Federal Reserve Board Building in Washington, DC on November 2, 2022.
Mandel Ngan/AFP via Getty Images, FILE
Further, government data last week showed that the US economy grew strongly at the end of last year, defying fears of an impending recession.
Still, most economists expect a recession later this year, as interest rate hikes weigh on the economy, according to a Bloomberg survey released last week. Forecasters expect gross domestic product to decline in the second and third quarters of this year, the survey found.
Growing evidence suggests that the Fed’s rate hikes have dampened some economic activity.
Home sales fell for the 11th consecutive month in December, hitting the lowest rate since November 2010, according to the National Association of Realtors.
Meanwhile, US retail sales fell in December, marking the end of a typically busy holiday shopping season. Year-on-year retail sales fell by about 1% last month, extending a nearly identical decline in November.
So far, however, the labor market has proven resilient, raising hopes for policymakers trying to cool prices without significant job losses.
In December, employers added 233,000 jobs and wages rose a strong 4.6% from a year ago.
