In the face of a persistently high inflation rate, the US Federal Reserve is anticipated to maintain interest rates at a 22-year high for its third consecutive meeting this week. The financial markets appear confident in another pause.
The central bank, grappling with a dual mandate of curbing inflation and addressing unemployment, is reluctant to definitively rule out another rate hike, keeping the optionality open. This stance contrasts with some other central banks, like the European Central Bank, whose policymakers advocate for a pause in rate hikes amid declining inflation. The Fed’s commitment to optionality sets it apart, creating a unique dynamic in the global monetary landscape.
Despite this tension, recent US economic indicators showcase positive trends, including low unemployment, robust job creation, economic growth, and a decline in inflation. The latest consumer price index (CPI) revealed an annual inflation rate of 3.2 percent, down from the pandemic-era peak of 9.1 percent. The string of positive data has sparked hopes that the Fed could achieve a soft landing, balancing its dual mandate without triggering a recession.
However, opinions diverge on the Fed’s future moves. While the probability of a December pause is over 98 percent, traders and analysts are less certain about what follows. Some predict interest rate cuts of 1.75 percentage points in 2024, surpassing the Fed’s recent forecast, while others foresee a more conservative approach. Meanwhile, the financial markets are pricing in around 1.25 percentage points of rate cuts in 2024, starting in March.
As the Fed releases its quarterly update to the summary of economic projections (SEP) alongside the interest rate decision, analysts hope for insights into policymakers’ perspectives on economic growth, inflation, unemployment, and potential rate cuts.
In this intricate landscape of economic indicators, market expectations, and global dynamics, the Federal Reserve faces the delicate task of charting a course that balances the need for continued economic growth with the imperative to curb inflationary pressures. The upcoming decision and the subsequent guidance from the Fed will likely play a crucial role in shaping the trajectory of monetary policy in the months ahead.
Sven Franssen