- The Federal Reserve is widely expected to keep its benchmark interest rate unchanged at next week’s meeting, and all eyes will be on what Fed officials say about their future actions.
- With inflation trending downward, market forecasts suggest the Fed has reason to cut rates next year, potentially as early as March.
- Fed officials are likely to emphasize the possibility of future interest rate hikes if inflation does not stabilize at an annual rate of 2%.
- Federal Reserve Chairman Jerome Powell and other Fed officials have sought to convey to the public their determination to bring inflation down to their target rate at all costs.
- The Fed has raised interest rates 11 times since March 2022, increasing borrowing costs for all types of business and consumer loans.
It is almost certain that the central bank’s benchmark interest rate will remain unchanged at the US Federal Reserve’s meeting next week, but even if no action is taken, policy makers’ words or statements could move the market. Gender is still there.
Market participants are hungry for information on when the central bank will start lowering the benchmark interest rate, which is currently at its highest level since 2001. The Fed has raised interest rates 11 times since March 2022, increasing borrowing costs for all types of companies. and consumer loans. The interest rate hike is an effort to slow the economy and stem inflation, which rose to a 40-year high in the summer of 2022.
All the news on inflation in recent months has been good, with consumer price inflation steadily declining toward the Fed’s 2% annual rate. That has led traders to speculate that the Fed may soon stop putting too much pressure on the economy and lower the benchmark federal funds rate. As of Friday, the market had priced in a 45% chance that the Fed would cut rates at its March meeting.
Last month, Fed Chairman Jerome Powell sought to put a damper on that idea, saying it was “premature” to speculate about rate cuts and saying the Fed could raise rates further if inflation worsens. Ta
Economists say Powell and other Fed officials will continue to hammer that message through public statements from the Federal Open Market Committee, subsequent press conferences, and a series of economic forecasts by FOMC members scheduled to be released Wednesday afternoon. I expected it to be.
“Despite the more encouraging news on inflation, Fed officials at next week’s meeting warned markets that a rate cut could come as early as March,” said Michael Pearce, chief U.S. economist at Oxford Economics. I predict that there will be strong opposition to the narrative that is being formed.” With explanation.
At the same time, Fed officials increasingly recognize that raising interest rates at a pace that is counter-inflationary would put a huge strain on the economy, risking slowing the economy too much and triggering a recession. The job market has slowed in recent months (though not to the extent of mass layoffs). Banks have become more selective in who they lend to. And some sectors of the economy, including the housing market, have slowed to a crawl.
The Fed’s own Beige Book, released last month and featuring anecdotes from businessmen and civic leaders across the country, includes reports of households struggling to make ends meet and living by sharing bills and meals. It was full of. The longer interest rates remain high, the worse these effects could become.
Still, Fed watchers widely expect Mr. Powell to deliver a series of harsh words. Part of the reason is that Fed communication itself is the Fed’s weapon against inflation. The conventional wisdom among central bankers is that the public’s perception of the future path of inflation is, at least in part, a self-fulfilling prophecy.
If people believe that future inflation will be high, they may act accordingly and buy early in advance of expected price increases. It would also encourage them to demand higher wages, both actions that could, or should, theoretically, push up inflation.
And if financial market participants believe the Fed will cut interest rates (which typically helps businesses), stock prices may soar and interest rates may fall, making financing easier and causing Fed inflation. There is a possibility that the fight against With all this in mind, there are good reasons why Fed officials are reluctant to declare victory prematurely.
The Fed’s reputation could also influence its decisions about when to cut rates and what to say about the likelihood of them. As James Knightley and other ING economists have noted, the Fed was criticized in 2022 for being slow to react to early signs of a spike in inflation. Mr. Powell and other officials may be willing to wait longer to cut rates, just to avoid the possibility of being seen as fools again if inflation picks up.
“Playing it safe should appeal to his instincts as a conservative lawyer: Why risk his reputation in a tough fight when doing nothing is enough?” Knightley wrote. .