The FED is under pressure to come up with a plan to cut interest rates next week

(TBTCO) – Next week, US Federal Reserve Chairman Jay Powell faces a difficult move to maintain flexibility in the US central bank’s policy plans in the face of strong pressure to Revealing the timing and extent of interest rate cuts next year.

The FED is under pressure to come up with a plan to cut interest rates next week
Fed Chairman Jay Powell is expected to use a press conference next Wednesday to emphasize that it is too early to declare a monetary policy pivot. Photo: Reuters

It is difficult for the FED to delay considering interest rate cuts

As the Federal Open Market Committee, the Fed’s policymaking arm, prepares for its final two-day meeting of 2023 starting on Tuesday (December 12), Mr. Powell faces a challenge. The economic picture is increasingly mixed. While the labor market is resilient and consumer spending is steady, there are signs of slower growth and, therefore, lower inflation.

Against that backdrop, the Federal Reserve is expected to hold interest rates for the third consecutive policy meeting and keep the federal funds rate at a 22-year high of 5.25-5.5 %. But, as officials extended the pause on interest rate hikes from July, they were not ready to say rates had reached a level “restrictive enough” to bring inflation down to the 2% target. They are also not ready to publicly discuss in more detail the possibilities that they will reduce borrowing costs next year beyond improved price pressures.

Next Wednesday, Fed policymakers will likely keep their “tightening” stance, as a provision if inflation picks up again, even if they think they have complete. The Fed’s forecasts will likely show its interest rate target slightly lower by the end of next year, but not as low as investors are currently predicting.

But, if the job market continues to slow and inflation continues to cool, policymakers may soon see no sense in keeping interest rates high and risk the economy falling into recession. withdraw. No one wants to see the economy grind to a halt.

The challenge for Mr. Powell this week is that financial markets do not believe his warnings that additional monetary tightening is still on the table. Investors believe the world’s largest economy has slowed enough to eliminate the need for further interest rate hikes. Furthermore, they believe that upcoming data will force the Fed to cut interest rates sooner than expected.

That thinking has caused financial conditions to ease in recent weeks, raising concerns that some of the Fed’s efforts to try to dampen demand are in jeopardy.

“They may have the feeling that they have completed the job, barring unexpected developments, but communicating that has risks and losses so they have to resist it.” — Ellen Meade, former consultant Senior advisor to the Fed board of governors until 2021 and currently working at Duke University, said. “This is a sensitive time because financial conditions are very important.”

Mr. Jay Powell will have the opportunity to once again reiterate the Fed’s message at a press conference on Wednesday (December 13), when he is expected to reiterate that it is “too early” to declare a policy The pivot is underway, even as inflation continues to moderate. Mr. Powell pointed out that the central bank is committed to only “flexible, careful” adjustments to upcoming decisions.

Before Mr. Powell takes the podium, the Fed will issue a policy statement and a summary economic forecast from each official on interest rates, growth, unemployment and inflation.

Will There is a stepping stone before exposure reverse interest rate process

Economists generally expect the central bank to leave the statement unchanged, which means it will still include an announcement outlining the conditions the Fed will take into account in determining “the extent of additional policy consolidation.” may be appropriate to bring inflation back to 2% over time.” They argue that eliminating that could risk sending too direct a signal that the Fed has actually completed the rate-hiking phase of its historic monetary tightening campaign.

The FED is under pressure to come up with a plan to cut interest rates next week
Job growth and cooling inflation are the basis for the FED to consider cutting interest rates.

Maintaining a similar rate cut next year would help make clear that the Fed is not prepared to reverse course abruptly even if consumer price growth moderates. Some economists said officials could point to an additional quarter-point cut in 2024 to capture a slightly more stable inflation outlook.

Matthew Raskin, a former senior New York Fed official who is now head of US interest rates research at Deutsche Bank, said signaling anything more than that could complicate things for investors. FED.

In September the federal funds rate was forecast to peak at 5.5-5.75% this year before falling half a percentage point in 2024 – economists will be watching closely to see whether concerns Whether there will be further cuts or not?

Deutsche Bank expects the central bank to cut its policy rate by 1.75 percentage points next year, starting in June. Economists at Morgan Stanley also believe the Fed will start lowering interest rates then but only 1 percentage point throughout 2024.

While the Fed may not be ready to hint at a policy change, Constance Hunter at MacroPolicy Perspectives said officials will be flexible as they approach the next phase of the fight against inflation.

In fact, the jobs report released last weekend showed that the US economy added 199,000 jobs last month. The unemployment rate fell from 3.7% to 3.9% and would have fallen further without the entry of more people into the labor pool. Average hourly earnings rose 4% from a year earlier, along with cooling inflation, suggesting workers’ increased purchasing power.

The overall impression is of a healthy job market. Investors had hoped that the Fed on Wednesday would not only keep interest rates on hold but also show it was ready to pivot to lower interest rates early next year./.

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