US Federal Reserve opens two-day meeting as consumer confidence drops

US Federal Reserve chairman Jerome Powell. Reuters

The Federal Reserve on Tuesday began its two-day Federal Open Market Committee with the expectation that officials will impose a smaller rate increase following signs that inflation is moderating.

The Fed raised interest rates seven times last year to the range of 4.25-4.50 per cent to rein in everyday costs. Now, with the economy showing signs of slowing, it is forecast to raise interest rates by 25 basis points on Wednesday. Doing so would bring interest rates to roughly 50 basis points of the Fed’s end-of-year 5.1 per cent projection.

The central bank’s meeting follows reports showing slowing wage growth, a stumbling housing market and an overall cooling of inflation. Still, at 6.5 per cent, inflation remains well above the Fed’s long-term 2 per cent goal.

Fed chairman Jerome Powell’s remarks after Wednesday’s report will be closely scrutinised to determine how far the central bank is willing to go to rein in prices.

The Fed has been attempting to ease the burden of high prices without driving the economy into a recession, known as a soft landing. But there are concerns that the Fed is being too aggressive in its actions.

A report last week showed the US economy had entered the year with weak momentum, as consumer spending dipped during the holiday months and savings increased.

And data on Tuesday showed consumer confidence in the US declined at the turn of the year amid fears over the jobs market, business conditions and the possibility of a recession.

The Consumer Confidence Index fell to 107.1, down from 109.0 in December, the Consumer Conference Board reported.

“Consumers were less upbeat about the short-term outlook for jobs. They also expect business conditions to worsen in the near term,” said Ataman Ozyildirim, senior director of economics at board.

US consumers were optimistic about economic and labour conditions to begin the year, but a decrease in the Expectations Index for January showed “their concerns about the economy over the next six months”, Mr Ozyildirim added.

The expectations index — which measures consumers’ short-term outlook on income, business and labour market conditions — fell to 77.8. A reading below 80 typically signals a recession within the next year, the board said.

Consumers also expect incomes to remain stable in the coming months, though few are planning to buy a new or existing home. Higher mortgage rates continue to push prospective buyers out of the market.

Meanwhile, the jobs market remains tight despite a slight cooling of wage growth. There are currently 1.7 openings for every jobseeker. Unemployment also remains at a 53-year low at 3.5 per cent.

The Federal Reserve has often cited the need for a softer labour market — ostensibly in the form of layoffs — to loosen monetary policy.

The US Labour Department will on Friday release its unemployment report for January, giving Fed officials a greater indicator of how interest-rate increases are affecting the labour force.