All eyes are now on the upcoming meeting of the Federal Reserve (Fed) scheduled for Tuesday and Wednesday. Market participants are eagerly awaiting any indications regarding the future of interest rates. The question at hand is whether rates, which currently stand at their highest level in decades, will remain unchanged or if there will be an increase.
It is widely anticipated that U.S. Central Bank policymakers will maintain the interest rate on federal funds during their meeting on Tuesday. This follows the decision made by the Federal Open Market Committee (FOMC) in September to keep the interest rate unchanged. In July, the interest rate was raised to a range of 5.25 percent – 5.50 percent.
Read more: The Fed holds interest rates steady, hints at a new hike before end of 2023
Traders closely monitor the policy statement of the U.S. Central Bank and its chair, Jerome Powell. This is given the consensus among Fed officials on this month’s interest rate decision. As customary, Powell will hold a press conference following the committee’s meeting. Market participants seek hints about the future trajectory of interest rates. Specifically, they are interested in whether there will be an increase followed by a subsequent decrease in future meetings.
Key point of attention
The key point of attention will be the post-meeting press conference with Powell. This is according to Michael Pearce, the lead U.S. economist at Oxford Economics.
The Fed is expected to maintain the possibility of future interest rate hikes. However, they will highlight that such decisions depend on sustained inflation and growth surpassing expectations.
The Fed aims to keep interest rates at a level that promotes reduced spending. This leads to a slower economy and helps achieve the target inflation rate of 2 percent.
There is a belief among some experts that the Fed has concluded its interest rate hikes, primarily due to the role financial markets play in influencing access to funds.
Last week, yields on 10-year Treasury bonds (T-bonds), which impact borrowing expenses across various loan types, reached a level not seen in 16 years. This comes amid traders’ concerns regarding mounting inflation.
Significant burden
Pearce stated that given the significant burden placed on markets due to tightening fiscal conditions, the Fed has a compelling rationale for maintaining its current position.
Conversely, there remains a possibility that the Fed may decide to increase the federal funds rate beyond its 22-year high during the December meeting or possibly in subsequent meetings.
Although recent reports indicate a gradual decline in inflation, it remains significantly below the peak annual rate of 9.1 percent recorded last summer. However, additional data suggests that there is still upward pressure on prices, compelling the Fed to take action in order to curb inflation by implementing higher interest rates.
Most robust growth
In the third quarter, the U.S. economy experienced its most robust growth in nearly two years, supported by rising wages that have contributed to increased consumer spending. This positive development poses a fresh challenge to the recession warnings that have been prevalent since 2022.
In the April-June quarter, the economy saw a growth rate of 2.1 percent, surpassing the threshold that Fed officials typically deem as a non-inflationary growth rate of approximately 1.8 percent.
Possible growth slowdown
While it is improbable that the rapid growth rate achieved in the previous quarter can be maintained, it serves as evidence of the economy’s resilience, even in the face of the Fed’s interest rate hikes. However, there is a possibility of a slowdown in growth during the last quarter due to factors such as worker strikes and the influx of millions of Americans repaying their university education loans.
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