The latest CPI report showed that falling energy prices pushed annual inflation down to 5% in March. Inflation is cooling faster than analysts had expected, but even today’s comparatively low 5% is two-and-a-half times higher than the Fed’s longstanding target of 2%. And interest rate hikes are still its primary weapon in the war on rising prices.
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The central bank showed its commitment to the strategy when it announced its ninth consecutive rate hike in March despite several high-profile bank failures that occurred, in part, because of rising interest rates. The Fed’s ultimate goal is the delicate economic balancing act known as a soft landing — raising rates just enough to cool inflation but not enough to trigger a recession.
It’s worked so far, but will the Fed tap the breaks this summer or risk overplaying its hand by making money even more expensive to borrow?
Economists Predict One Final Hike, Then a Long Pause
Although no one knows for sure what the Fed will do in the runup to summer, there’s widespread agreement among the people who know best.
Reuters polled 105 economists about their expectations in the coming months. Ninety-four of them — nearly 90% — predict the central bank will hike rates again in May by 0.25%, the same as the most recent increase in March.
The panel also predicted that May would be the Fed’s final rate increase for 2023 and that a “short and shallow” recession would follow later in the year.