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The U.S. Federal Reserve is expected to end the year with two high-profile meetings as it prepares to hold interest rates on hold on Wednesday and postpone further tightening amid mixed signals from the world’s largest economy.

The Federal Open Market Committee is widely expected to keep its key interest rate at a 22-year high on Wednesday, giving the central bank more time to assess progress in bringing inflation back to its 2 percent target.

The move is the clearest sign yet that officials believe the risks facing the U.S. economy have become more complex, setting up a busy few months in which they will measure the impact of a campaign of interest rate hikes, which has already begun to slow economic activity.

If too little is done now to counteract price pressure, high inflation could become entrenched. Doing too much jeopardizes hard-earned career progress.

“A year ago we found ourselves in a situation that was completely clear in one dimension. It was obvious that they had to raise interest rates, and raise them aggressively,” said David Wilcox, who led the Fed’s research and statistics department until 2018. “Today we are in a different situation where it is much more accurate to assess whether they have done enough.”

Even officials who were worried about containing inflation are increasingly worried about monetary policy becoming too restrictive – a development that will complicate future decisions and make the Fed’s next interest rate meeting on October 31 a cliffhanger.

While market participants generally expect the Fed to keep interest rates at current levels of 5.25 to 5.5 percent well into 2024, nearly half of leading academic economists recently surveyed by the Financial Times expect that the Fed will raise interest rates another quarter point, more than 40 percent predicted two or more increases of this magnitude.

As hawkish Fed officials keep the door open to higher borrowing costs — even as they favor a slower pace of tightening amid signs of a labor market slowdown — economists face a tricky question: What will prompt the central bank to tighten monetary policy again to attract?

One factor is the U.S. consumer, whose spending has defied expectations of a deeper slowdown – a surprising resilience that could keep prices high. Fed Chairman Jay Powell addressed this at the central bank’s symposium in Jackson Hole, Wyoming, last month.

“I think they have another rise ahead at some point simply because underlying inflation still has more momentum than we expected at this point in the cycle,” said Kristin Forbes, a former Bank of England official, who now teaches at the Bank of England Massachusetts Institute for Technology.

Other economists argue that it will take a revival in consumer spending, not just continued resilience, to persuade the Fed to curb demand further.

Forbes, like most economists recently surveyed by the FT, is also concerned about rapidly rising oil and fuel prices.

Kristin Forbes; “I think they have another hike ahead of them at some point” © Bloomberg

Central bankers typically look past such fluctuations in commodity prices, and some economists argue that higher gasoline prices discourage consumers from spending money elsewhere. But “after going through a period of volatility and high inflation like this, you have to be more sensitive to those shocks,” Forbes said.

Other uncertainties complicating the Fed’s decision-making process and contributing to a troubled inflation outlook include the Midwest autoworkers’ strike, the possibility of a government shutdown by the end of the month and the resumption of student loan repayments in October.

“We should expect some bumps in the inflation path, so it will depend on how the Fed filters the incoming data and how that impacts its inflation forecast for 2024,” said Brian Sack, former head of the New York Fed’s Markets Group. “At this point, I don’t think we’ve seen anything that suggests a major overhaul.”

Rising short- and long-term Treasury yields and broader tightening of financial conditions would also support the Fed’s efforts to combat inflation, he added.

Even though the FOMC is leaning toward no further policy action this year, economists believe Powell doesn’t want to rule it out.

“The last thing in the world he wants to do is create a sense of clarity or certainty that they are done,” said Wilcox, who now works at the Peterson Institute for International Economics and Bloomberg Economics.

The Fed will also release a series of new economic forecasts on Wednesday, including a revised “dot plot” that summarizes individual officials’ forecasts for the federal funds rate.

Year-end growth forecasts are also expected to be revised upwards, even as inflation forecasts – minus volatile food and energy prices – are cut. The dot chart is expected to show officials’ support for another quarter-point rate hike this year, with some economists believing there could also be fewer rate cuts in 2024 as the Fed recommits to lowering interest rates to stay higher for longer.

“Although things are moving in the right direction, they need to be wary of anything that could push inflation expectations higher,” said Peter Hooper, a Fed veteran who now works at Deutsche Bank.

“They fully understand that in order to complete their task, they must stay on track until they get a little closer.”

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