On Wednesday afternoon, the Federal Reserve is expected to launch a new attack against inflation in the FOMC meeting statement. Both a rate hike of 0.75 percentage points and a hawkish tone from Chairman Jerome Powell at his post-meeting news conference are plausible outcomes. The Fed will not give the markets the all-clear signal they have been waiting for.
The Federal Open Market Committee started meeting this week, and the futures markets are pricing in a range of 3.75% to 4.00% for the fed funds rate goal. That would be the fourth consecutive 0.75 percentage point increase and the sixth increase in 2022. Powell will speak at 2:30 p.m. ET after releasing the committee’s policy statement at 2.
The Federal Reserve seems nearing its rate-hike cycle’s conclusion rather than the beginning. Nonetheless, you shouldn’t count on Powell to confirm this.
Richard Farr, the chief market strategist at Merion Capital Group, said, “The Fed’s best hand is to boost [0.75 percentage point] and otherwise zip it.”
Over the last year, many economic indicators have slowed, especially in interest rate-sensitive sectors like the housing market. Foreign economies are in worse condition. The U.S. labor market is a significant bulwark, with a strong unemployment rate of 3.5% and rising job opportunities and earnings. Core inflation is still at an uncomfortable 8.2% year-over-year increase through September, primarily due to the so-called wage-price spiral.
The futures market places the most probability on the peak or terminal rate occurring in the first half of 2023, with the rate falling by the end of the following year. The possibility of a “Fed pivot,” in which the central bank reverses its policy of tightening to one of relaxing, or at least halts, rate rises for a while. It keeps rates stable and has recently been the focus of investors and traders.
Since the beginning of the season, when investor sentiment favored a tighter pivot, risk assets rose in tandem. At the same time, they fell when sentiment favored a wider one. As Milton Friedman put it, the problem with monetary policy is that it has “large and varied delays.” Thus, it may be prudent to reduce or halt rate rises before inflation is anything near a sustainable level since it will take time for higher interest rates to influence the actual economy and lower inflation.
FOMC meeting statement may indicate that FOMC members anticipate a pause in rate rises. Keep an eye out for the committee “anticipating that continuing increases in the goal range will be reasonable” line to be altered or removed from the previous statement.
John Vail, the chief global strategist at Nikko Asset Management, argues, “They are working hard to ensure that inflationary mindset is channeled.” A shift in the Fed’s posture from its present data-dependent but broadly hawkish leaning to something a little more neutral would take more than just one negative data point but rather a string of such over months.
Indicators suggest a dovish turn in Fed policy would cause stock and bond prices to rise. A bond rise would have the opposite effect of the Fed’s tightening and inflation struggle by lowering rates and easing financial conditions.
So, even if the chairman thinks a shift or pause may soon be necessary, Powell will likely maintain a hawkish stance in his Wednesday statements.
The senior U.S. economist at RBC Capital Markets, Tom Porcelli, says, “The difficulty is the minute he relinquishes this hawkish stance—the moment he utters anything even approximating a dovish phrase,” financial conditions soften significantly more than what we’ve seen in the previous few weeks. While we agree that the current hiking cycle has reached its natural conclusion, we do not believe that the current economic climate motivates him to indicate as much.
There is also the possibility of over-tightening. There is a pressing need to reduce inflation, yet doing so could require a prolonged economic downturn. A more extended period with higher interest rates from the Fed means a lower rate of return for many asset types.
Before the next FOMC meeting in December, officials will have had a chance to review two months’ worth of data on employment and Consumer Price Index levels. Those may be important in establishing the central bank’s future steps. Currently, however, the message will continue to be “we still have work to do.”
Featured Image- Megapixl @ Dizain777
Author Shariq Khan 
