WATCH LIVE: Federal Reserve Chairman Jerome Powell provides update after interest rate decision

WASHINGTON (AP) — Set to raise interest rates Wednesday for the 10th time, Federal Reserve officials face two competing economic trends that could make future rate decisions more difficult and treacherous.

The event is scheduled to begin at 2:30 p.m. ET. Look in the player above.

On the one hand, turmoil in the banking sector and political battles over the government’s borrowing limit could weaken the economy if banks restrict lending and financial markets crash over fears of a default. of the national debt. Such concerns would argue against further rate hikes, at least for now.

On the other hand, inflation, while slowing, remains well above the central bank’s target rate of 2%, raising concerns that the Fed will need to tighten credit further to slow the rise in prices. Further rate hikes would follow – a trend that would lead to ever-higher borrowing rates and increase the risk of recession.

The wide range of potential outcomes could cause divisions among Fed officials, even as they are set to raise their benchmark rate to 5.1% on Wednesday, the highest level in 16 years. The big question is whether the Fed will also signal on Wednesday that it is now inclined to hold off on rate hikes — unless inflation picks up again — and keep its key rate unchanged for the rest of 2023 as it assesses its progress in cooling inflation.

“There is clearly some division (among Fed officials), which is reasonable, given that we don’t know where we are, and these things are going in the wrong direction,” Diane Swonk said, Chief Economist at KMPG.

Austan Goolsbee, president of the Federal Reserve Bank of Chicago, last month cited banking turmoil and the likelihood that many banks will tighten credit for consumers and businesses as the reason for potentially forgoing a rate hike this week.

“I think we have to be careful,” Goolsbee said. “We should collect additional data and be careful not to increase rates too aggressively.”

Similarly, Philadelphia Fed President Patrick Harker warned of excessive rate hikes and the risk of derailing the economy.

Other regional fed bank chairs, including James Bullard of the St. Louis Fed and Neel Kashkari of the Minneapolis Fed, said they would prefer the central bank to stay firm and raise its key rate to at least 5, 4%, which would require an additional hiking rate after this week.

This divergence reflects the difficult path facing the Fed. When inflation peaked at 9.1% last June, the Fed was generally united in its support for rapid and aggressive rate hikes. Now that its key rate is at a level that should restrict growth and that inflation slowed to 5% in March, unanimity could be more difficult to maintain.

The Fed meets this week in an increasingly cloudy economic environment. Turmoil resurfaced in the country’s banking sector after regulators seized and sold First Republic Bank over the weekend. It was the second-largest U.S. bank failure and the third major bank meltdown in the past six weeks. Investor concerns over whether other regional banks could suffer similar problems as the First Republic sent shares tumbling on Tuesday.

Wall Street traders were also angered by Treasury Secretary Janet Yellen’s announcement on Monday that the nation could default on its debt as soon as June 1 unless Congress agrees to lift the debt limit. before this date. The debt limit caps the amount the government can borrow, and Republicans in Congress are demanding deep spending cuts as the price for agreeing to lift the borrowing cap.

Both of these developments could weigh on an already slowing economy. The Fed wants the economy to cool down somewhat, as less borrowing and spending should also help contain inflation. But especially if the political battles over the debt ceiling escalate, the economy could slide into a recession deep enough that the Fed will be forced to cut interest rates later this year, even if the inflation is not completely under control.

Goldman Sachs estimates that a general decline in bank lending could reduce US growth by 0.4 percentage points this year. That could be enough to trigger a recession. In December, the Fed predicted growth of just 0.5% in 2023.

The Fed’s likely rate hike on Wednesday comes as other major central banks are also tightening credit. European Central Bank President Christine Lagarde is expected to announce another interest rate hike on Thursday, after inflation figures released on Tuesday showed price increases had risen in the past month.

Consumer prices rose 7% in the 20 countries that use the euro in April from a year earlier, compared with a 6.9% year-on-year increase in March.

In the United States, although headline inflation has fallen due to lower prices for gasoline and many goods, “core” inflation – which excludes food and energy price volatility – remained chronically elevated. According to the Fed’s preferred measure, core prices rose 4.6% in March from a year earlier, similar to December.

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