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Fed facing a blurrier outlook as it meets to weigh rate hike
Mar 21

AP Economics Writer

WASHINGTON (AP) - The Federal Reserve is grappling with a hazier economic picture clouded by turmoil in the banking industry and still-high inflation just as it meets to decide whether to keep raising interest rates or declare a pause.

Yet the Fed will not only have to decide whether to extend its year-long streak of rate hikes despite the jitters roiling the financial industry. The policymakers will also try to peer into the future and forecast the likely path of growth, employment, inflation and their own interest rates.

Those forecasts will be released Wednesday, when most economists expect the Fed to announce a relatively modest quarter-point hike in its benchmark rate, its ninth hike since March of last year.

The projections this time will be particularly difficult. In their most recent forecasts in December, Fed officials projected that they would raise their short- term rate to about 5.1%, roughly a half-point above the current level. Some Fed watchers expect the policymakers on Wednesday to raise that forecast to 5.3%.

But the upheaval in the banking industry has made any expectations far less certain. The Fed is meeting less than two weeks after Silicon Valley Bank failed in the second-largest bank collapse in American history. That shock was followed by the failure of another major bank, Signature Bank. A third, First Republic Bank, was saved from collapse by a $30 billion cash infusion.

Given the heightened uncertainties overhanging the financial system, there's a small chance that the Fed could decide not to issue its usual quarterly projections. Three years ago, when the pandemic struck, the Fed moved up a scheduled policy meeting to a Sunday, rather than on Tuesday and Wednesday, to urgently address the economic anxieties caused by new pandemic restrictions. After that meeting, the Fed didn't release any quarterly projections.

At the time, Powell said that issuing economic and interest rate forecasts, when the consequences of the COVID-19 pandemic were so unclear, "could have been more of an obstacle to clear communication than a help." Still, the unusual decision then was as much a reflection of the chaos of the early pandemic as it was of the uncertain outlook.

If the Fed does raise its key rate by a quarter-point on Wednesday, it would reach roughly 4.9%, the highest point in nearly 16 years. Early this month, Powell had said in congressional testimony that a half-point rate increase would be possible at this week's meeting.

By The Associated Press, Copyright 2023

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