Source: AFP
The U.S. Federal Reserve is widely expected to keep interest rates at a 22-year high for a third straight meeting on Wednesday as it continues to fight rising inflation.
With financial markets almost certain another pause is coming, traders and analysts are now debating how soon the U.S. central bank will start cutting interest rates, and how quickly it will do so thereafter.
“The given is that there will be no rate hike,” EY chief economist Gregory Dako told AFP. “But there are many unknowns about how the Fed will frame the policy outlook going forward next year.”
The Fed, which has a dual mandate to reduce inflation to its long-term target of 2% while tackling unemployment, continued to keep alive the threat of another rate hike.
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“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance or to speculate on when policy might be eased,” Fed Chairman Jerome Powell said recently.
EY’s Daco said the Fed is fighting a “battle of optionality” in which policymakers continue to insist another rate hike could happen, “if deemed necessary.”
Source: AFP
That battle puts the Fed at odds with other central banks, such as the European Central Bank, whose policymakers have expressed increasing support for ending rate hikes amid a sharp fall in inflation.
Progress on inflation
Recent US economic data shows low unemployment, resilient job creation, positive economic growth and falling inflation.
The most recent consumer price index (CPI) showed an annual inflation rate of 3.2%, down from the pandemic-era peak of 9.1%.
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Stocks rise mostly ahead of US jobs
The string of positive data has raised hopes that the Fed will fulfill its dual mandate without plunging the world’s largest economy into a damaging recession — a rare feat in monetary policy known as a “soft landing.”
The results are many for President Joe Biden as he seeks re-election in 2024.
New numbers came out Friday showing an increase of 199,000 new jobs last month, and Biden told a crowd in Las Vegas that such steady expansion is what we call a ‘sweet spot’ needed for steady growth and lower inflation, not encouraging the Fed to raise interest rates”.
In futures markets, traders have assigned a greater than 98 percent chance that the Fed will hold steady on its next rate decision this week, according to CME Group data.
Dispute over future cuts
Source: AFP
While there is broad consensus on a December pause, traders and analysts are far less certain about what comes next.
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“The debate around monetary policy easing will become more active next year as progress in inflation continues further,” Deutsche Bank economists wrote in a recent note to clients.
They forecast rate cuts of 1.75 percentage points in 2024 — much higher than the Fed’s recent forecast of cuts of just half a percentage point.
Meanwhile, financial markets are pricing in about 1.25 percentage points of rate cuts next year, starting in March, according to EY’s Daco.
It predicts the Fed will cut interest rates by just one percentage point in 2024, starting in May.
“So not only do we have a later start to the tightening cycle, but fewer rate cuts,” he said.
Other analysts predict an even less aggressive course of rate cuts.
“We maintain our baseline that the Fed will remain on hold until December 2024 before implementing cuts for every other meeting,” economists at Barclays wrote in a recent note to investors.
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Canada keeps key interest rate at 5%
Alongside the interest rate decision this week, the US central bank will release its quarterly summary of economic projections, or SEP, after which Powell will address reporters.
The SEP should give analysts and traders better insight into policymakers’ thinking about economic growth, inflation, unemployment and interest rate cuts.
“We expect updated economic forecasts and the post-meeting press conference to push back the idea that rate cuts could be on the agenda anytime soon,” Michael Pearce, chief economist at Oxford Economics, wrote in a recent note to clients.
“If anything, we expect policymakers to err on the side of leaving interest rates too high for too long.”
Source: AFP