Today, the Federal Reserve is expected to maintain its target rate for fed funds, leaving it unchanged at 5.50%, as set during the July 26, 2023, meeting. This decision aligns with a successful streak of forecasts by experts spanning thirteen FOMC meetings since March 16, 2022.
Confident in their predictions, experts anticipate the Fed’s acknowledgment of a potential end to the rate hike cycle that began in March 2022. The terminal rate, seen as the point where inflation naturally recedes without further rate hikes, may have been reached. The lagged effects of previous hikes are anticipated to bring inflation down to the Fed’s 2.0% target in due time.
Today’s FOMC announcement will unveil an updated Statement of Economic Projections (SEP), featuring forecasts known as “dots” covering interest rates, unemployment, and economic growth. Despite past inaccuracies, the Fed relies on these projections, emphasizing their role in shaping the decision-making process. Following the announcement, Fed Chair Jay Powell will conduct a press conference.
While the Fed maintains flexibility, reserving the right to raise rates in the face of worsening inflation, current expectations suggest no imminent need for such actions. The possibility of a rate cut remains distant, with a mid-2024 pivot date seeming most likely.
Yet, uncertainties persist. The Fed faces a complex dilemma with the latest inflation data indicating a drop from 9.1% in June 2022 to 3.1% in November. While significant progress, achieving the 2.0% target proves elusive, raising questions about the ease of future decisions.
Today’s inflation data, though unlikely to influence the Fed’s immediate decision, could offer insights into future policy directions. The recent decline in long-term interest rates, a factor the Fed relied on to curb inflation, may prompt a reassessment. The Fed may consider another short-term rate hike to compensate for the sudden drop in long-term rates.
Wednesday’s decision is not expected to deviate from the status quo. The true impact, if any, will likely manifest in early 2024 when the Fed decides to maintain, raise, or cut rates based on the evolving economic landscape.
Sven Franssen