Uncertainty over the path of inflation later this summer makes it hard to predict the Federal Reserve’s next steps following a likely quarter-percentage point increase in interest rates this week. Some Fed policy makers and economists are concerned that the easing in inflation will be temporary. They see inflation’s slowdown as long overdue after the fading of pandemic-related shocks that pushed up rents and the prices of transportation and cars.
And they worry underlying price pressures could persist, requiring the Fed to lift rates higher and hold them there for longer. Other economists say that thinking ignores signs of current economic slowing that will gradually subdue price pressures. They also argue inflation will slow enough to push “real" or inflation-adjusted interest rates higher in the coming months.
That would provide additional monetary restraint even if this week’s rate increase is the last of the current tightening cycle. The Fed last month held its benchmark federal-funds rate steady in a range between 5% and 5.25%, its first pause after 10 consecutive increases since March 2022, when officials raised it from near zero. Interest-rate increases slow the economy through financial markets by lowering asset prices and raising the cost of borrowing.
Inflation cooled last month to its slowest pace in two years. The consumer-price index climbed 3% in June from a year earlier, sharply below the recent peak of 9.1% in June 2022. The index for core inflation, which excludes volatile food and energy prices, in June also posted its smallest monthly increase in more than two years.
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