Home » What to expect from the Fed meeting
Business Economy Finance

What to expect from the Fed meeting

The Federal Reserve is expected to raise interest rates by half a point at the conclusion of its two-day policy meeting on Wednesday, an indication that the central bank is pulling back on its aggressive stance as signs begin to emerge that inflation may be easing.

Although that increase would be smaller than the three-quarter-point hikes announced at the past four Fed meetings, it’s nothing to scoff at.

It’s still double the Fed’s customary quarter-point hike, and a sizable increase that will likely cause economic pain for millions of American businesses and households by pushing up the cost of borrowing for homes, cars and other loans.

The Fed’s anticipated action would increase the rate that banks charge each other for overnight borrowing to a range of between 4.25% and 4.5%, the highest since 2007.

Federal Reserve Chairman Jerome Powell confirmed last month that smaller rate hikes could be expected, saying: “The time for moderating the pace of rate increases may come as soon as the December meeting.”

The latest inflation reading, as measured by the Consumer Price Index, showed year-on-year price increases slowed to 7.1% in November. But inflation is unlikely to slow dramatically any time soon, partly due to continued pressure on wages amid a shortage of workers. Yet Wall Street appears to believe the Fed will eventually be forced to pivot away from, or even reverse its regimen of rate hikes. Traders are largely pricing in rate cuts in the second half of 2023.

The Fed will conclude its rate hike regimen by the second quarter of next year, predicted JPMorgan analysts in a recent note. “With inflation continuing to fade and fiscal policy likely on hold, the Fed is likely to end its tightening cycle early in the new year and inflation could begin to ease before the end of 2023,” they wrote. The analysts expect two quarter-point hikes in the first half of 2023.

But the average period between peak interest rates and the first reductions by the Fed is 11 months, which could mean that even if the central bank stops actively hiking rates, they could remain elevated into 2024.

Investors will closely read the Fed’s economic outlook, the Summary of Economic Projections, which is also due out Wednesday. And they will watch Powell’s press conferences for clues about what’s to come — though they may end up sorely disappointed.

​”We expect Fed Chair Powell will insist on the need to hold policy at a restrictive level for some time to bring inflation down toward the 2% target,” wrote Gregory Daco, chief economist at EY-Parthenon, in a note to clients Monday. “This will serve to push back against current market pricing … Powell will stress that history cautions strongly against prematurely loosening policy.”

What about the famous soft landing?

The Fed has increased its benchmark lending rate six times this year in an attempt to discourage borrowing, cool the economy and bring down historically high inflation that peaked at 9.1% over the summer.

Even if interest rate hikes do ease off, they will remain high, and economists are largely expecting that the US economy will endure a recession next year. Powell said in November that there is still a chance the economy avoids recession but the odds are slim, noting: “To the extent we need to keep rates higher longer, that’s going to narrow the path to a soft landing.”

In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen — Powell’s predecessor at the Fed — said there is “a risk of a recession. But it certainly isn’t, in my view, something that is necessary to bring inflation down.”

And the economy has so far withstood the Fed’s aggressive rate hikes. The job market is healthy, wages are growing, Americans are spending and GDP is strong. Business is also good: Companies are largely beating revenue expectations and reporting positive earnings results.

A global problem

The Fed isn’t acting alone, it’s just one of nine central banks expected to make a rate announcement this week. Landing softly on the ever-narrowing path between high inflation and recession is a global concern as central banks across the world contend with similar economic problems.

The European Central Bank, the Bank of England and the Swiss National Bank are expected to follow the United States with half-point moves of their own on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines will also likely increase their borrowing costs this week.

The Federal Reserve announces its rate hike decision Wednesday at 2 p.m., followed by a press conference with Chair Powell at 2:30 p.m.

Source : CNN

Translate