(Bloomberg) — Federal Reserve officials are on track to raise interest rates a quarter percentage point next month and signal a potential pause from the steepest hiking campaign in decades.

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Policymakers across the hawkish and dovish ends of the spectrum stress that inflation is still too high and the US central bank has more work to do. But there’s also concern that fallout from recent bank failures will slow the economy.

Many caution that a tightening of lending standards sparked by last month’s banking stress could lead to a pullback in spending and weigh on growth and prices, lessening the need for further rate increases.

What officials do beyond the May 2-3 meeting will hinge on what happens with the economy, which so far has weathered higher borrowing costs. The Federal Open Market Committee may leave the door open to either holding borrowing costs steady or hiking again at their subsequent gathering in mid-June as they assess the banking landscape.

“It is still too early to gauge the magnitude and duration of these effects, and I will be closely monitoring the evolution of credit conditions and their potential effects on the economy,” New York Fed President John Williams, who is also vice chair of the FOMC, said on Wednesday.

Williams was the only member of Fed leadership to publicly discuss monetary policy before the blackout period commenced Friday midnight. Powell has been silent since last month apart from brief remarks on financial regulation. The Fed vice chair’s seat has been vacant since Lael Brainard departed for the White House in February.

Financial firms have tightened access to credit since last year, when the Fed began rapidly raising borrowing costs to tackle high inflation. A sharp acceleration of that trend following the collapses of Silicon Valley Bank and Signature Bank could tip the economy into recession.

Sticky Prices

But if the banking strain fades and the labor market remains strong, policymakers may decide that more rate increases are needed to stifle stubbornly high inflation. It could spark more disagreement down the line among Fed officials about how to proceed.

“They’re mostly on the same page for one last hike, in May, without any pausing before reaching the peak,” said Derek Tang, an economist at LH Meyer/Monetary Policy Analytics in Washington. “The sticking point is when to ease and more crucially what to say about it.”

Officials get more data to mull next Friday with the release of the quarterly employment cost index and the March reading of the Fed’s preferred inflation gauge, the PCE price index.

Investors expect the Fed will hike rates by 25 basis points next month from a current target range of 4.75% to 5%, according to futures pricing. Median forecasts released last month showed policymakers see rates rising to 5.1% by year end. Projections will be updated in June.

St. Louis President James Bullard, who doesn’t vote on monetary policy this year, is in the camp of wanting to do more. He said he expects the banking issues to be resolved without a sharp downturn, and favors raising rates into a 5.5% to 5.75% range.

What Bloomberg Economics Says…

“There is a shared sentiment among most FOMC members that the end of the current tightening cycle is near, with a strong hint toward one last 25 basis-point hike at the May meeting. Still, there’s more internal disagreement than meets the eye.”

— Anna Wong (chief US economist)

Chicago Fed President Austan Goolsbee urges more caution, saying he wants to see if the fallout from the recent bank collapses cause the economy to slow more than expected.

“If banks are pulling back, it behooves us to pay attention to the data and ask how much of our normal monetary policy job is getting done for us by the credit conditions,” Goolsbee said Wednesday.

The Fed and other regulators provided emergency liquidity to prevent wider problems in the banking sector. Officials said they aim to address the financial stability concerns with those macroprudential tools, a strategy that allows them to continue fighting inflation with additional rate increases.

Recent reports suggest the banking stress may have stabilized but has not completely subsided. After several weeks of declines, banks increased their borrowings from the Fed’s emergency programs in the most recent week.

And the Beige Book survey released Wednesday showed the US economy stalled in recent weeks and several Fed districts said access to credit was narrowing.

“At some point, most likely in the middle of the year, we’ll get to the point at which the economy reaches a stall speed and that could be very consequential in terms of policy, said Yelena Shulyatyeva, senior US economist for BNP Paribas. “I think they’re going to do another rate hike, but they will be very careful about talking about what happens next.”

Even some typically hawkish officials are hinting the rate hike campaign is drawing to a close, but note the final end point will be determined by the data.

“We are much closer to the end of the tightening journey than the beginning,” Cleveland Fed President Loretta Mester said Thursday. “How much further tightening is needed will depend on economic and financial developments and progress on our monetary policy goals.”

–With assistance from Matthew Boesler.

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