Failure to decline inflation as expected causes uncertainty about raising interest rates

Inflation is still a preoccupation for major central banks around the world, and raising the interest rate is still the remedy that the heads of those banks have to deal with inflation despite the negative effects that this measure causes on the banking system and the economy in general.
The American Wall Street Journal quoted confirmation from Jerome Powell, Chairman of the US Federal Reserve, as saying that it is likely to raise interest rates in the coming months, but he said that it should be more slowly than before.
Federal Reserve officials left interest rates unchanged last week, after raising them in ten consecutive meetings, in a policy aimed at combating inflation, but Powell told the US House of Representatives Financial Services Committee, “Investors, consumers and borrowers should not think that it is over.” .
“Given how far we’ve come, it might make sense to raise interest rates but to do it at a more moderate pace,” Powell said.
The newspaper pointed out that inflation and economic activity did not slow down as much as many officials had expected this year, which casts more uncertainty about the extent to which interest rates will rise this year. Banking, will eventually lead to a slowdown more severe than expected.
At last week’s meeting, officials left the federal funds rate in a range of 5% to 5.25%. Most expected two more increases this year, which would take it to a 22-year high, and Powell called the forecast “a very good guess of what would happen if the economy performed as expected.”
After keeping the federal funds rate near zero during the COVID-19 pandemic, the Fed has raised the rate at every meeting since March 2022 by a cumulative 5 percentage points, the fastest series of increases since the 1980s. Officials have slowed their increases this year, raising the rate by a quarter of a percentage point in their past three meetings, most recently in May.
Powell, in his hearing before the US House Financial Services Committee, likened the Fed’s recent action to a driver who, after pulling off the highway, proceeds at a slower speed to avoid missing the final destination.
The Fed fights inflation by slowing the economy, by raising interest rates, which leads to tightening financial conditions such as higher borrowing costs, lower stock prices, and a stronger dollar.
Ahead of last week’s decision, Powell and some of his colleagues hinted at a possible compromise, whereby officials forgo a rate hike in June while leaving open the possibility of a hike at their July 25-26 meeting.
The newspaper reported that investors in interest rate futures markets see an 80% chance that the Federal Reserve will raise interest rates next month.
She also indicated that some Federal Reserve officials were more skeptical last March about the need to raise interest rates at a higher rate after the failure of three medium-sized banks, and they saw that the high financing costs for many other banks might cause a credit crisis, especially if banks faced More losses from defaults on commercial mortgages backed by property such as office buildings that have recently fallen in value.
“We’ve seen the effects of our policy tightening on demand in the most interest rate sensitive sectors of the economy,” Powell told the Financial Services Committee. However, it will take time for the full effects of monetary restrictions to materialize, especially on inflation.
The newspaper stated that bank failures this year in the United States may lead to a problem for the Federal Reserve, as it balances the need to eliminate inflation by keeping interest rates high with the risks of increasing the high costs of capital on the banking system.
In the latest projections, Fed policymakers cut their forecasts for how quickly “core” inflation will slow this year, with most expecting it to ease to just 3.9% by the end of the year.