Fed likely to pause rate hikes despite higher inflation

Fed likely to pause rate hikes despite higher inflation

Fed likely to pause rate hikes despite higher inflation

The U.S. Federal Reserve is widely expected to hold interest rates steady on Sept. 20 after a summer of mixed economic data, while leaving the door open to another hike if needed.

The Fed has raised interest rates 11 times over the last 18 months, lifting its key lending rate to a level not seen for 22 years as it tackles inflation still stubbornly above its long-term target of two percent.

After falling sharply over the last year, inflation has ticked up again in recent months due to a spike in energy costs, keeping up the pressure on the Fed.

But analysts and traders still broadly expect the U.S. central bank to hold rates steady on Sept. 19-20 in order to give policymakers more time to assess the health of the world's largest economy.

"We think the Fed is done with its tightening cycle," EY Chief Economist Gregory Daco told AFP. 

"After raising rates in July, we expect the Fed to follow through on strong pre-meeting signals and hold rates steady," Deutsche Bank economists wrote in a note to clients.

The rate-setting Federal Open Market Committee (FOMC) now finds itself in a difficult situation as it seeks to address inflation through interest rate hikes while avoiding a recession, a feat that economists call a soft landing.

Recent economic data showing strong economic growth in the first half of the year, inflation trending downward, and a softening jobs market suggests the Fed may just be able to pull it off.

"I think, in general, the economy is doing relatively well, but we are seeing signs that there is an economic slowdown underway," said Daco.

Analysts at Goldman Sachs recently cut their forecast for a recession in the United States from 20 percent likelihood down to 15 percent, while other economists - including those in the Fed's research team - say they no longer expect the U.S. to enter a recession.

Some FOMC members - including Fed Chair Jerome Powell - have indicated that they see a narrow path for the Fed to achieve a soft landing in the coming months.

"We expect participants to retain a bias toward one more rate hike as they did in June," KPMG US Chief Economist Diane Swonk wrote in a recent blog post.

"In our base case, the FOMC will 'skip' hiking at their meeting this month and then deliver one final 25bp hike in November," Citigroup economists wrote in a recent note to clients.

Traders currently assign a probability of more than 95 percent that Fed will hold its key lending rate its current level of between 5.25 and 5.50 percent on September 20,