The Federal Reserve is expected to slow its dizzying pace of rate hikes at the conclusion of its two-day policy meeting on Wednesday, as Consumer prices have shown evidence cooling for two consecutive months.
The central bank is expected to raise its benchmark interest rate by half a percentage point to new levels of 4.25% and 4.5%, marking the highest levels since December 2007.
The Fed will announce its latest policy decision at 2 p.m. ET on Wednesday, with a press conference hosted by Chairman Jerome Powell set to begin half an hour later.
The move would usher in a phase of slower rate hikes after the central bank increased its target range for the benchmark interest rate by 0.75% at each of the last four policy meetings. best.
Fed Chairman Jay Powell planned a 50 basis point rate hike last week, said in a speech it“makes sense to adjust the pace of our rate hikes as we get close to a level of containment that would be sufficient to reduce inflation.”
“The Fed has made it clear that they have moved a lot and because their actions have been slow in effect, they need to wait and be patient to see how much of an increase affects the economy in the coming months. ,” Tony Roth, Chief Investment Officer at Wilmington Trust, said in an interview.
The Fed is weighing between raising rates too much and causing a recession, but not raising rates enough to cool down inflation.
However, some encouraging signs of inflation appear to be emerging.
Wednesday’s announcement will come just a day after US inflation data showed price growth had slowed for a second straight month.
“Core” inflation, which strips out the more volatile food and energy components and is the Fed’s preferred way to measure price pressures, rose 0.2% month-on-month and 6% year-over-year in November. In October, “core” inflation increased by 0.3% and 6.3% on a monthly and annual basis, respectively.
Headline inflation, which includes all categories, rose 7.1% year-on-year in November.
“Fed may overlook better-than-expected October results [inflation] Paul Ashworth, chief North American economist at Capital Economics, wrote to clients Tuesday.
Ashworth added: “Tuesday’s report strongly supports our long-held view that accelerated deflation will soon convince the Fed to move aside after another 25bp hike in early February. “
While the Fed may slow the pace of rate hikes, Powell and other officials have said rates will need to move higher than anticipated since September. recommended rate will peak at around 4.6% next year.
Since that meeting, Fed officials have socialized the idea of a near 5% interest rate before the central bank ends its current tightening cycle. On Wednesday, the Fed will release an updated set of economic forecasts, including officials’ expectations for interest rates over the next few years.
Roth told Yahoo Finance he thinks interest rates will rise to around 5%, but possibly as high as 5.25%.
“I don’t think it’s going to be much higher because I think we’re going to see a decline in consumer balance sheets and that will bring down service inflation,” Roth said.
For the Fed to raise rates much higher than 5%, Roth said the economy will need to stay strong and not fall into a recession. In Roth’s view, wages also need to continue to rise on a positive basis of around 2-3%, increasing the likelihood of a wage spiral where higher prices lead to higher wages leading to even higher prices. higher, in Roth’s view.
Fed officials said they expected to keep interest rates at their highest for “some time,” the officials said. But how long is that?
New York Fed President John Williams doesn’t see that happening until 2024. Still, the market is pricing in a rate cut starting in the second half of next year.
How Powell handles those tensions will be a key focus for investors on Wednesday.
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