If rate hikes don’t come, the question is how long the Fed will keep borrowing costs punishingly high and how well the job market will fare.
Fed policymakers have forecast unemployment could rise a percentage point this year, though it currently stands at a modern-day low of 3.5 percent.
The Fed’s staff economists project a mild slowdown later this year, although they expect the economy to begin recovering by next year, which will be important for President Joe Biden as he takes a second term in the White House.
But if inflation remains stubbornly high, central bank officials could hit the brakes on growth even harder, causing a sharp rise in unemployment and damaging Biden’s re-election hopes.
Central bank policymakers are closely monitoring progress toward raising the ceiling on the U.S. government’s borrowing capacity. If Congress can’t come to an agreement and the Treasury can’t make payments on time, it could lead to a sharp rise in interest costs for the federal government and borrowers around the world; Treasury bonds are the backbone of all other credit markets.
The central bank’s policy rate is now in the range of 5 percent to 5.25 percent.