U.S. Fed is Anticipated to Implement a Modest Rate Hike: Analysts

Via Syndicated Feed

The U.S. Federal Reserve predicted to raise its target interest rate by a quarter percent on Wednesday, shifting from the rapid hikes employed last year to control rising inflation to a gradual approach towards finding a stopping point. This move would place the benchmark overnight interest rate for the U.S. central bank in the 4.50%-4.75% range, the highest since November 2007, when the economy was just before experiencing a prolonged and severe recession.

Policymakers aim to prevent a similar outcome as in the past, and the economic data since their last meeting in December has generally shown positive trends: Inflation has decreased due to the effect of higher interest rates and more stringent financial conditions while the economy is still expanding and generating employment.

The Federal Open Market Committee responsible for setting rates will issue its policy statement at 2 PM Eastern Standard Time (1900 GMT). Afterward, Fed Chair Jerome Powell is slated to hold a press conference to explain the decision further.

According to Nathan Sheets, the Chief Global Economist at Citi, recent events imply that the upcoming year might be less complicated than anticipated. He stated that the risk of a recession had decreased worldwide, and U.S. data suggests ongoing growth, declining inflation, and a decrease in the frequency of rate hikes by the Federal Reserve.

Before the Federal Reserve's two-day meeting this week, the International Monetary Fund (IMF) raised its outlook for the global economy, which its officials described as "surprisingly resilient" despite the tightening monetary policy and ongoing conflict between Russia and Ukraine.

The Fed was caught off guard last year as inflation rapidly increased and proved to be more persistent than expected. In response, the Fed approved the quickest interest rate hikes since the 1980s. Beginning with a 0.25% hike in March, the central bank increased rates by 0.75% in increments by the summer and raised the target policy rate by 4.25% in only ten months. The Fed also implemented a 0.5% rate hike during its policy meeting on December 13th and 14th.

The effects of the policy changes are becoming more pronounced. For example, recent data showed that a significant inflation measure declined faster than expected in December, continuing a six-month downward trend. Additionally, growth in employment costs, closely monitored as a potential indicator of future price increases, decreased in the fourth quarter.

However, the Fed's preferred inflation measure, the personal consumption expenditures price index, still increased at a 5% annual rate in December, although this is down from its June peak of nearly 7%. Nevertheless, this is still double the central bank's 2% inflation target.

The policymakers are determined to only make the mistake of halting further rate hikes once they are confident that inflation is consistently returning to the 2% goal.

Some analysts predict that the Fed will eliminate the current "ongoing increases" phrase from its policy statement, which has been in use since the central bank began its tightening cycle in March. Nevertheless, any replacement language suggests the possibility of further interest rate increases based on incoming economic data, particularly regarding inflation and employment.

BNP Paribas economists described the anticipated quarter-percentage-point rate hike as a "hawkish downshift" ahead of the policy meeting this week. However, they stated that while they expect the Fed to reduce the pace of tightening to quarter-percentage-point increments, they also anticipate a solid resolve to curb inflation. Policymakers are optimistic about recent developments but remain united in their determination to continue reducing inflationary pressures.

This week's Federal Reserve meeting, the first of 2023, will not involve updated economic projections from Fed policymakers, which is the most straightforward way for them to show the future direction of interest rates. 

In December, the median prediction of Fed policymakers was that the target interest rate would reach a high between 5.00% and 5.25%, indicating that the tightening of monetary policy would stop after two more increases of a quarter of a percentage point. However, traders in futures related to the Fed's policy rate anticipate a different outcome, with the benchmark rate peaking between 4.75% and 5.00% and dropping to around 4.4% by December.

This story has not been edited by IndraStra Global Staff and is auto-generated from a syndicated feed.

IndraStra Global is now available on
Apple News, Google News, Flipboard, RSS, and Telegram

COPYRIGHT: This article is published under a Creative Commons Attribution-NonCommercial-NoDerivatives 4.0 International License. https://creativecommons.org/licenses/by-nc-nd/4.0/

REPUBLISH: Republish our articles online or in print for free if you follow these guidelines. https://www.indrastra.com/p/republish-us.html