Fed Holds Steady: No Expected Rate Hike This Week Despite Lingering Inflation Concerns

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On Tuesday and Wednesday, the Federal Open Market Committee will convene to discuss whether to raise interest rates once again. The majority of economists and Fed watchers anticipate that the central bank will refrain from tightening this time around. The Fed leadership is careful to announce its decisions in order to avoid frightening the markets.

However, the Fed is in a precarious position because it has been hiking rates for more than a year. It must maintain high rates in order to fight inflation, but it does not want to tighten policy to the point where the economy enters a downturn. Progress has not been as pronounced in recent months after a year of continuous decreases in inflation.

The consumer price index for the year ending in September registered inflation at 3.7%, the same rate as the previous month. Inflation increased by 0.4% from month to month, which was a little more than expected.

The personal consumption expenditures price index, the Fed’s favored inflation indicator, likewise remained stable at 3.4% for the fiscal year that ended in September.

Both of those figures remain higher than the Fed’s 2% objective. Still, inflation has significantly decreased from last year, when it spiked beyond 9%, indicating real improvement.

Officials like Fed Chairman Jerome Powell have hinted that the Fed would hold rates where they are unless signs emerge that inflationary growth is resuming. The Fed has made it clear that it is waiting to decide whether to raise rates in the future. Also, this week, most investors anticipate a response.

Greg McBride, chief financial analyst at Bankrate, stated to the Washington Examiner that “no rate hike is expected.” “But I think we’ll hear a pretty familiar refrain otherwise—that the Fed is committed to price stability, that there is still a long way to go to get inflation to 2%, and that they will maintain the posture that allows them the flexibility to raise interest rates again if needed.”

According to the CME Group’s FedWatch program, which estimates the probability using futures contract prices for rates in the short-term market the Fed is targeting, investors believe there is a 97% chance the Fed won’t raise rates at this upcoming meeting.

The probability that the Fed will increase rates before the end of the year is now only 19%, down from 40% just one month ago.

There is a “media blackout” period before every FOMC meeting during which Fed representatives are not permitted to speak with the media. Before that blackout, Powell tried to reassure the markets about the Fed’s plan of action in his final address.

Powell stated earlier this month that “the committee is proceeding carefully given the uncertainties and risks and how far we have come.” “Based on the totality of the incoming data, the evolving outlook, and the balance of risks, we will decide the extent of additional policy firming and how long policy will remain restrictive.”

Powell’s speech wasn’t wholly dovish and was perceived as more cautious and balanced, even if there was no signal of a rate rise after this upcoming meeting. He did make the suggestion that the Fed may carry out further rate rises in the future if the statistics show that inflation isn’t significantly declining.

“Recent figures demonstrating the tenacity of economic growth and labor demand have our attention. Additional proof of consistently above-trend growth or that labor market tightness isn’t abating might jeopardize future reductions in inflation and necessitate tightening of monetary policy, the economist said.

According to McBride, the only information that has reached the Fed amid the media embargo is the scorching September gross domestic product number, which was released on Thursday.

The Bureau of Economic Analysis announced that the third quarter of this year saw an increase in economic growth to a seasonally adjusted annual rate of 4.9% from 2.1%. That was greater than economists’ predictions of a robust 4.2% gain.

Olu Sonola, head of U.S. economics at Fitch Ratings, stated that the economy “transitioned from resilience to reacceleration this quarter, defying the Federal Reserve’s aggressive tightening cycle and tighter financial conditions.” “The Fed’s job does not get any easier over the coming quarters despite the strength of consumer spending and the boost to growth from government spending.”

Following its most recent meeting in September, the Fed itself provided its own economic forecasts.

Even if the Fed will eventually cease raising rates, Henry Allen, a macro analyst at Deutsche Bank, said in a statement on Monday that markets have previously been caught off guard by not taking their more hawkish signals seriously and then having to play catchup.

By the time of the Fed’s upcoming meeting in September, authorities will have two more official monthly reports on inflation and the labor market to consider. According to experts, these reports will likely provide further insight into the Fed’s future course of action.

James Knightley, chief international economist at ING, and other ING economists wrote in a statement last week that while the Fed will continue to imply the possibility of more raises, they “doubt it will carry through” as a result of the credit cycle shifting.