Federal Reserve braces for another rate hike in crucial week for central banks

Federal Reserve policymakers are expected to raise rates again on Wednesday to the highest level in 22 years.

What happened: The Federal Reserve and the European Central Bank are expected to raise interest rates by 25 basis points. However, the main focus will be on whether policymakers will implement future rate hikes or plan for an extended pause, Bloomberg reported.

According to the outlet, Fed Chairman Jerome Powell and ECB President Christine Lagarde expressed concerns about continued high inflation, which led them to raise borrowing costs.

However, with no central banks holding another meeting before September, economists say the political outlook for the latter part of the year remains to be determined.

In contrast, the Bank of Japan stands out as an outlier, with more than 80% of analysts predicting that Governor Kazuo Ueda will continue to support the world's third-largest economy, even if inflation remains above its 2% target.

Bloomberg said the Federal Open Market Committee would most likely raise rates by a quarter point, bringing the range to 5.25%-5.5%, marking the 11th increase in the past 16 months.

Also read: Here's how $78 billion left the US banking system in a single week

The tariff decision is expected to be released at 2:00 p.m. EST in Washington, with Powell holding a press conference 30 minutes later.

The July hike comes after a pause in June that was put in place to moderate the pace of hikes as rates approach a level restrictive enough to bring inflation back to the 2% target over time.

"Inflation is slowing, but not fast enough for the Fed," James Knightley, chief international economist at ING Financial Markets LLC, told Bloomberg. "As the job market remains firm, officials are not taking any risks."

As a quarter-point rate hike this week looks highly likely, attention will focus on Lagarde's characterization of the ECB's policy plans beyond July, Bloomberg reported.

Officials have emphasized that decisions will be data-driven, and September could be the first month they truly embrace this principle.

Read now: Fed suspends interest rates: A short-lived pause - or the end of the hiking frenzy? 5 economists react

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