The Federal Reserve is expected to raise interest rates by half a point (0.50) at the conclusion of its two-day economic policy meeting on Wednesday (14), an indication that the central bank is pulling back on its aggressive stance as signs begin to emerge that inflation may be easing.
Although this increase is smaller than the three-quarters (0.75) point increases announced at the last four Fed meetings, the eventual increase is not to be ignored.
That’s still double the Fed’s usual quarter-point (0.25) increase, and a sizeable increase that is likely to cause economic problems for millions of American businesses and families, raising the cost of borrowing for homes, cars and other areas.
The Fed’s early action would increase the rate banks charge each other for overnight loans to a range between 4.25% and 4.5%, the highest since 2007.
Federal Reserve Chair Jerome Powell confirmed last month that smaller rate hikes can be expected, saying: “The time to moderate the pace of rate hikes may come as early as the December meeting.”
But while inflation is unlikely to slow dramatically any time soon, in part due to continued pressure on wages amid worker shortages, Wall Street appears to believe the Fed will eventually be forced to back off or even reverse its hike regime. of interest. Traders are mainly pricing in the rate cuts in the second half of 2023.
The Fed will complete its rate hike regime in the second quarter of next year, JPMorgan analysts predicted in a recent note. “With inflation continuing to ease and fiscal policy likely on hold, the Fed will likely end its tightening cycle early in the new year and inflation could start to ease before the end of 2023,” they wrote. Analysts expect two quarter-point increases in the first half of 2023.
But the average period between the peak of interest rates and the first Fed cuts is 11 months, which could mean that even if the central bank stops actively raising rates, they could remain elevated in 2024.
Investors will be looking closely at the Fed’s Economic Outlook, Summary of Economic Forecasts, which will also be released on Wednesday. And they’ll watch Powell’s press conferences for clues about what’s to come – though they could end up very disappointed.
“We expect Fed Chair Powell to insist on the need to keep policy at a tight level for some time to bring inflation down to the 2% target,” Gregory Daco, chief economist at EY-Parthenon, wrote in a note. to customers on Monday (12). “This will serve to pull back against current market prices […] Powell will emphasize that history strongly warns against premature loosening of policy.”
And the famous soft landing?
The Fed has raised its benchmark interest rate six times this year in a bid to discourage borrowing, cool the economy and reduce historically high inflation, which peaked at 9.1% in the summer.
Even if interest rate hikes slow, they will remain high, and economists expect the US economy to suffer a recession next year.
Powell said in November that there is still a chance the economy can avoid a recession, but the chances are slim, noting: “To the extent that we need to keep rates higher, this will narrow the path to a soft landing.”
In an interview that aired on CBS on Sunday, Treasury Secretary Janet Yellen – Powell’s predecessor at the Fed – said there is “a risk of a recession. But it is certainly not, in my view, necessary to reduce inflation.”
And the economy has so far resisted the Fed’s aggressive rate hikes. The job market is healthy, wages are rising, Americans are spending, and GDP is strong. Business is also doing well: companies are largely beating revenue expectations and reporting positive earnings results.
a global problem
The Fed isn’t acting alone, it’s just one of nine central banks due to make a rate announcement this week. Landing softly on the ever-tightening path between high inflation and recession is a global concern, as central banks around the world face similar economic problems.
The European Central Bank (ECB), Bank of England (BoE) and Swiss National Bank are expected to follow the US with half a point moves on Thursday. Norway, Mexico, Taiwan, Colombia and the Philippines are also expected to increase their borrowing costs this week.
The Federal Reserve announces its rate hike decision Wednesday at 4:00 pm ET, followed by a press conference with President Powell at 4:30 pm.
Source: CNN Brasil
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