US Federal Reserve anticipated to extend rate pause as inflation nears target
The US Federal Reserve has decided to maintain interest rates at a 22-year high for the third consecutive meeting, aiming to counter persistently high inflation. Market consensus supports another pause, prompting speculation on when and how the central bank might initiate interest rate cuts in the future.
EY Chief Economist Gregory Daco notes the certainty of no rate hike but emphasizes uncertainties surrounding the Fed’s policy outlook for the upcoming year. Fed Chair Jerome Powell maintains a cautious stance, asserting the need to avoid premature conclusions about policy changes.
While the Fed remains committed to its dual mandate of curbing inflation and addressing unemployment, it continues to hold the possibility of a rate hike, creating a contrast with central banks like the European Central Bank advocating an end to rate hikes.
Recent economic indicators reveal low unemployment, resilient job creation, positive economic growth, and a decrease in inflation. The latest Consumer Price Index reports an annual inflation rate of 3.2%, down from a pandemic-era peak of 9.1%. The optimistic data fuels hopes for a “soft landing,” avoiding a recession in the world’s largest economy.
President Joe Biden, eyeing reelection in 2024, emphasizes the importance of stable growth and lower inflation. Market sentiment, reflected in futures markets, indicates a probability exceeding 98% that the Fed will maintain the current interest rates at its upcoming decision.
Despite consensus on a December pause, uncertainty looms regarding future actions. Deutsche Bank economists project more significant interest rate cuts in 2024 than the Fed’s forecast, while others anticipate a less aggressive approach. Traders are pricing in around 1.25 percentage points of rate cuts in 2024, starting in March.
As the Fed convenes this week, analysts await the quarterly update to the Summary of Economic Projections (SEP) for insights into policymakers’ perspectives on economic growth, inflation, unemployment, and potential interest rate cuts.
The central bank’s post-meeting press conference is expected to provide further clarity, with some experts anticipating policymakers to lean towards maintaining rates higher for an extended period.
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