The US Federal Reserve will likely hold its key lending rate at a 22-year high on Wednesday and signal two rate cuts next year, in the first of a series of crucial central bank announcements this week. The second day of rate talks began at 9:00 am (1400 GMT) on Wednesday, the Fed said in a statement.
With a pause deemed extremely likely, attention is on the language of the Fed’s decision, along with its accompanying economic forecasts, and the post-meeting press conference by Fed Chair Jerome Powell.
The Fed, which has a dual mandate to lower inflation to its long-term target of two percent while also tackling unemployment, has continued to keep the threat of another rate hike alive. “It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” Powell said recently.
His comments appear to put the Fed at odds with other central banks such as the European Central Bank (ECB), where policymakers have indicated that they are likely done hiking interest rates.
Despite the Fed’s aggressive policy of monetary tightening, the world’s biggest economy grew at an annualized rate of 5.2 percent in the third quarter. Headline consumer inflation in the United States fell further last month, according to fresh data published Tuesday, while the unemployment rate has remained close to historic lows.
The data suggest the Fed is on track for a so-called “soft landing,” a rare feat in monetary policy when high interest rates bring down inflation without plunging the country into a damaging recession.
On Wednesday, US Treasury Secretary Janet Yellen welcomed the Fed’s recent progress against inflation, and said she expects the rate of price increases to fall below three percent next year. “My baseline is that we’ll achieve a soft landing,” Yellen, a former Fed Chair, told CNBC in an interview. “Monetary policy is an art and not exactly a science yet, and it requires skill and a good dose of luck to get that exactly right,” she said.
The Fed will publish updated economic forecasts alongside its rate decision, which will shed light on whether or not policymakers still expect half a percentage point of rate cuts in 2024, as they did in September. The financial markets are pricing in around 1.25 percentage points of rate cuts next year, starting in March, according to EY Chief Economist Gregory Daco.
He predicts the Fed will cut interest rates by only one percentage point in 2024, beginning in May. KPMG Chief Economist Diane Swonk also thought the Fed would begin cutting rates in May, but added in a note Tuesday that it will “likely want to keep the door open a crack” to additional rate hikes.
Some economists see cuts starting earlier in the year, and others expect fewer cuts, beginning much later in the year. “We retain our baseline that the Fed will remain on hold until December 2024 before implementing every-other-meeting cuts,” economists at Barclays wrote in a recent investor note. – Daniel AVIS
