Fed prepares another rate increase as Wall Street wonders what's next

Federal Reserve officials are set to make a second abnormally large interest rate increase on Wednesday as they race to cool down an overheating economy. The question for many economists and investors is just how far the central bank will go in its quest to tame inflation.

Central banks around the world have spent recent weeks speeding up their interest rate increases, an approach they’ve referred to as “front-loading.” That group includes the Fed, which raised interest rates by a quarter-point in March, a half-point in May and three-quarters of a point in June, its biggest move since 1994. Policymakers have signaled that another three-quarter-point move is likely on Wednesday.

The quick moves are meant to show that officials are determined to wrestle inflation lower, hoping to convince businesses and families that today’s rapid inflation won’t last. And, by raising interest rates quickly, officials are aiming to swiftly return policy to a setting at which it is no longer adding to economic growth, because goosing the economy makes little sense at a moment when jobs are plentiful and prices are climbing quickly.

But, after Wednesday’s expected move, the Fed’s main policy rate would be right at what policymakers think of as a neutral setting: One that neither helps nor hurts the economy. With rates high enough that they are no longer actively juicing growth, central bankers may feel more comfortable slowing down if they see signs that the economy is beginning to cool. Jerome H Powell, the Fed chairman, is likely to keep his options open, but economists and analysts will parse every word of his postmeeting news conference on Wednesday for hints at the central bank’s path ahead.

“It feels like 75 is kind of in the books — the interesting thing is the forward guidance,” said Michael Feroli, the chief US economist at JP Morgan, explaining that he thinks the key question is what will come next. “It’s easier to slow down going forward, because every move will be a move into tightening territory.”

The Fed’s latest economic projections released in June suggested that officials would raise rates to 3.4 percent by the end of the year, up from around 1.6 per cent now. Many economists have interpreted that to mean that the Fed will raise rates by three-quarters of a point this month, half of a point in September, a quarter-point in November and a quarter-point in December. In other words, it hints that a slowdown is coming.