Fed eyes ‘skip’ in rate hikes

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WASHINGTON – Don’t call it a ‘pause.’

When the Federal Reserve meets next week, it is widely expected to leave interest rates alone – after 10 straight meetings in which it has jacked up its key rate to fight inflation.

But what might otherwise be seen as a ‘pause’ will likely be characterized instead as a ‘skip.’ The difference? A ‘pause’ might suggest that the Fed may not raise its benchmark rate again. A ‘skip’ implies that it probably will – just not now.

The purpose of suspending its rate hikes is to give the Fed’s policymakers time to look around and assess the extend to which higher borrowing rates are slowing inflation. Calling next week’s decision a ‘skip’ is also a way for Chair Jerome Powell to forge a consensus among an increasingly fractious committee of Fed policymakers.

One group of Fed officials would like to pause the hikes and decide, over time, whether to increase rates any further.

But a second group worries that inflation is still too high and would prefer that the Fed continue hiking at least once or twice more – beginning next week.

A ‘skip’ serves as compromise.

When the Fed chair speaks at a news conference next Wednesday, he will likely make clear that the central bank’s key rate – which has elevated the costs of mortgages, auto loans, credit card and business borrowing – may eventually go even higher.

For more than a year, the Fed’s 18-member rate-setting committee has presented a united front: The officials were nearly unanimous in their support for rapid rate hikes to throttle a burst of inflation that had leapt to the highest level in four decades. (The committee has 19 members at full strength; one spot is now vacant.)

The Fed raised its rate by a substantial 5 percentage points in 14 months – the fastest pace of increases in 40 years – to a 16-year high. The policymakers hope that the resulting tighter credit will slow spending, cool the economy and curb inflation.

The rate increases have led to sharply higher mortgage rates, which have contributed to a steep fall in home sales. The average rate on a 30-year mortgage has nearly doubled, from 3.8% in March 2022 to 6.8% now. Compared with a year ago, sales of existing homes have tumbled by nearly a quarter.

Several Fed officials contend that rates are already high enough to slow hiring and growth and that if they go much higher, they could cause a deep recession. This concern has left policymakers deeply divided about their next steps.