Investing.com — The Federal Reserve is widely tipped to leave interest rates on hold at a 22-year high for a third straight meeting, although observers expect the central bank to temper projections that it will begin to cut borrowing costs 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 stressed 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 could also use the publication of its quarterly “dot plot,” a rough outline of officials’ rate expectations, to moderate hopes for a rate reduction sometime in the first two quarters of 2024. Some Fed members have suggested that they are starting to ponder whether policy is now sufficiently restrictive to quell inflation, while others have argued that several more months of slowing price growth may be needed before a cut is justified.
The likelihood that the Fed will assume a more hawkish outlook — and ultimately choose to keep rates higher for a longer period of time — was bolstered by inflation data earlier this week which showed that price growth, while cooling due in part to falling fuel costs, is still sticky. Easing inflation back down to its 2% target has been the central objective of the Fed’s long-standing monetary tightening campaign, and policymakers will need 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 roles than anticipated 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 unwanted upward pressure to wages and, by extension, inflation.
But the numbers still indicated that the Fed may be on track to achieve 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 statement 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
Fed Rate Monitor Tool
, the probability that the Fed will slash 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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