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© Reuters
Investing.com — The Federal Reserve is widely expected to maintain interest rates at a 22-year high for a third consecutive meeting, despite observers expecting the central bank to moderate projections that it might start to lower borrowing rates early next year.
Following the decision from the rate-setting Federal Open Market Committee at 14:00 ET (19:00 GMT) on Wednesday, markets will be keeping a close eye on a press conference held by Fed Chair Jerome Powell. Powell, who has previously emphasized that the Fed will move “carefully” before pivoting away from a more restrictive policy stance, will likely push back against bets that officials will start to lower rates from their current range of 5.25% to 5.50% in the spring.
The Fed may also use the publication of its quarterly “dot plot,” a rough map of officials’ rate expectations, to dampen hopes for a rate cut in the first two quarters of 2024. Some Fed members have suggested that they are starting to question if policy is now sufficiently restrictive to quell inflation, while others have argued that several more months of slowing economic growth may be needed before a cut is justified.
The possibility that the Fed will consider a more hawkish outlook — and ultimately choose to keep rates higher for a longer period — was bolstered by inflation data earlier this week which showed that consumer price growth, while cooling partly due to falling gasoline prices, is still stubborn. Easing inflation back down to its 2% target has been the central goal of the Fed’s prolonged financial tightening campaign, and policymakers will want to be confident that prices are on a downward trajectory towards that mark before rolling out a potential policy pivot.
A closely-watched payrolls report last week also found that the U.S. economy added more jobs than expected in November. The data was interpreted as a sign that the labor market has remained resilient despite the rate-hiking cycle. Such a trend could theoretically lend unwelcome upward pressure to wages and, by extension, inflation.
However, the numbers still indicated that the Fed may be on track to engineer a so-called “soft landing,” in which price gains are successfully tamed without sparking a meltdown in the broader economy. As a result, markets are becoming increasingly convinced that rates have likely peaked.
“Chair Powell and the FOMC post-meeting commentary will technically reflect a hiking bias. But not one that is meant to be believed,” analysts at Citi said in a note to clients.
According to Investing.com’s, the probability that the Fed will cut rates by a quarter percentage point in March next year stands at just under 43%, while there is a roughly 50% chance of an equally-sized cut in May.
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