It would boost the nation’s key interest rate to its highest level in 16 years, making future rate decisions more difficult and treacherous.
The wide range of potential outcomes could provoke divisions among Fed officials, even as they’re expected on Wednesday to raise their benchmark rate to 5.1%, the highest level in 16 years. The big question is whether the Fed will also signal Wednesday that it’s now inclined to pause its rate increases — barring any re-acceleration of inflation — and keep its key rate unchanged for the rest of 2023 as it assesses its progress in cooling inflation.
“I think we need to be cautious,” Goolsbee said. “We should gather further data and be careful about raising rates too aggressively.” That divergence reflects the fraught path confronting the Fed. When inflation was spiking to a peak of 9.1% last June, the Fed was mostly united in its support for fast and aggressive rate increases. Now that its key rate is at a level that should restrict growth and inflation has slowed to 5% as of March, unanimity could be harder to maintain.The Fed is meeting this week against an increasingly cloudy economic backdrop.
Goldman Sachs estimates that a widespread pullback in bank lending could cut U.S. growth by 0.4 percentage point this year. That could be enough to cause a recession. In December, the Fed projected growth of just 0.5% in 2023.
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