Federal Reserve Expected to Slow Rate Increases and Offer Hints at Future

Federal Reserve officials appear poised to end the year of highest inflation since the 1980s on an upbeat note: They are expected to slow down the campaign to cool the economy. at Wednesday’s meeting, just like the upcoming data gives reason to hope that the upside will fade in the time to come.

Central banks are expected to raise interest rates by half a percentage point to 4.25 to 4.5%. That would be a slowdown from their previous four meetings, where they raised rates in three-quarter point increments.

Officials will also release a series of new economic forecasts that, for the first time since September, will provide a glimpse into how high they expect interest rates to rise in 2023. and how long they plan to keep them at that level.

Fed policymakers raised borrowing costs at the fastest pace in decades this year to slow demand in the economy, hoping to ease inflationary pressures and stem a rise. quickly became a lasting feature of the American economy. Although inflation is now showing signs of slowing, it is still much faster than normal, and central banks have made it clear that they have more work to do to ensure that inflation returns to normal.

But policy changes take time to take effect, and the Fed wants to avoid inadvertently squeezing demand to the point that it causes the economy to shrink more than necessary to keep inflation under control. That’s why officials are moving away from super-fast price increases and into a new phase where they focus on how high interest rates will go, and perhaps even more importantly, interest rates. How long will it take to increase?

“How quickly has been answered and highs appear to be on the horizon – how much longer remains unknown,” said Michael Gapen, chief US economist at Bank of America. “If we want to bring inflation down to 2%, we still have to remove some of the labor market tightening.”

Fed sets 2% annual inflation target, but price hikes are happening at around three times that speed for the year through October, based on the central bank’s preferred index. A more timely inflation measure announced on Tuesday, Consumer price indexsuggested that inflation slowed significantly in November – which should give officials some reason to believe.

However, price increases for services, including dental care and sports games, are still rapid. At least one key driver of service inflation – rents – is likely to ease slightly in 2023. But for other types of services, rapid wage growth could make inflationary pressures difficult to cool. completely.

Jerome H. Powell, the Fed’s chair, said services outside of housing “may be the most important category for understanding the evolution of core inflation going forward.” in recent times speech. “Because wages represent the largest cost in providing these services, the labor market holds the key to understanding inflation in this category.”

Average hourly earnings are now up 5.1 percent on an annualized basis, significantly faster than the roughly 3% annual increase common before the pandemic. As companies pay their workforce more, they will likely try to charge customers more to cover their growing labor bills.

The Fed’s final set of economic forecasts predicted that rate will increase to 4.6% in 2023. Officials say they could be slightly higher than the new forecast, in part because the labor market has recovered better and inflation is more stable than many forecast. guess.

Investors will be closely analyzing the new release for any hint of how high interest rates will go next year. On Tuesday, they bet the Fed would stop raising rates once rates hit the 4.75 to 5% threshold next year – suggesting that central banks will make two more rate hikes later. move this week.

But so would Wall Street if it weren’t for more focus on what Mr. Powell said about the central bank’s plans after the rate move halts. Mr. Powell will hold a press conference at 2:30 pm

Fed officials have communicated that they plan to keep interest rates high for a while to quell inflation once and for all. But market prices suggest investors expect they will start cutting rates as early as the second half of next year – a disconnect that seems likely to center on comments by the Fed chair on Wednesday. Private.

Policymakers have said they don’t want to overdo their policy response, but the more serious mistake would be to let inflation take root in the economy.

If price increases continue to erode Americans’ wages for years on end, they could start to feed themselves, with consumers demanding more pay rises and companies making adjustments. higher prices to cover increasing input and labor bills. That kind of self-fulfilling cycle is exactly what the Fed is trying to avoid.

In the 1970s, officials allowed inflation to remain at a slightly higher than normal rate for several consecutive years, which created what economists have since called an “inflationary sentiment.” broadcast”. When oil prices spike for geopolitical reasons, a inflation base has increased and high inflation expectations have boosted prices sharply. Fed policymakers finally raised rates almost 20 percent and push the unemployment rate to double digits to bring prices back under control.

Today’s central banks want to avoid a repeat of that painful experience. Therefore, they have signaled that they do not want to give up the fight against inflation too soon.

“We will continue the course until the work is done,” Mr. Powell said in a speech late last month.


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