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The U.S. Federal Reserve is set to wrap up the year with two high-stakes meetings, as it prepares to hold rates on Wednesday and postpone any further tightening amid mixed signals from the world’s largest economy.
The Federal Open Market Committee is widely expected to keep its benchmark interest rate at its highest level in 22 years on Wednesday, giving the central bank more time to judge progress in the reducing inflation to its target of 2 percent.
The move is the clearest sign yet that officials believe the risks facing the U.S. economy have become more complex, and marks the start of a busy few months as they gauge the impact of a campaign rising interest rates which has already started to paralyze activity.
Do too little at this stage to combat price pressures and high inflation could take root. Overdo it and jeopardize hard-earned job gains.
“A year ago we were in a situation that was completely clear in one dimension. It was obvious that they had to raise the policy rate and they had to do it aggressively,” said David Wilcox, who led the Fed’s research and statistics division until 2018. “Today we are in a different situation where it’s a It’s much closer to knowing if they’ve done enough.
Even officials who worried about containing inflation are increasingly worried about tightening monetary policy — a development that will complicate future decisions and make the Fed’s next rate-setting meeting, which begins on October 31, a cliffhanger.
While market participants generally believe the Fed will keep interest rates at the current level of 5.25 to 5.5 percent through 2024, nearly half of the leading academic economists recently surveyed by the Financial Times expect the Fed to raise another quarter point, while more than 40 percent predicted two or more increases of that magnitude.
As hawkish Fed officials keep the door ajar to higher borrowing costs — even as they endorse a slower pace of tightening in the face of signs of a slowing labor market — economists are left with a thorny question : what will encourage the central bank to tighten the monetary screw again?
One factor to consider is the U.S. consumer, whose spending has defied expectations of a deeper slowdown — a surprising resilience that could keep prices high. Fed Chairman Jay Powell addressed this topic last month at the central bank’s symposium in Jackson Hole, Wyoming.
“I think they’re still pricing in another rise at some point, just because underlying inflation is even more buoyant than expected at this point in the cycle,” said Kristin Forbes, a former Bank of America official. ‘England who now teaches at the Bank of England. Massachusetts Institute of Technology.
Other economists argue that it will take a reacceleration of consumer spending, not just continued resilience, to push the Fed to further restrict demand.
Forbes, like most economists recently interviewed by the FT, is also concerned about the rapid rise in oil and fuel prices.
Central bankers generally ignore these fluctuations in commodity prices, and some economists say rising gasoline prices will deter consumers from spending elsewhere. But “after going through a period of volatility and high inflation like this, you have to be more sensitive to these shocks,” Forbes said.
Other issues complicating the Fed’s decision-making process and worsening the volatile inflation outlook include the auto workers’ strike in the Midwest, the possibility of a government shutdown by the end of the month and the resumption of student loan repayments in October.
“We should expect some irregularities in the path of inflation. So the key is how the Fed filters the incoming data and how that affects its inflation forecast for 2024,” said Brian Sack, former head of the Fed. New York Fed Markets Group. “At this point, I don’t think we’ve seen anything that suggests a significant revision of that.”
Rising short- and long-term Treasury yields, alongside a broader tightening of financial conditions, will also help the Fed’s efforts to combat inflation, he added.
Even if the FOMC leans toward no new policy action this year, economists believe Powell will be reluctant to rule it out.
“The last thing in the world he wants is to create a sense of clarity or certainty that things are over,” said Wilcox, who now works at the Peterson Institute for International Economics and Bloomberg Economics.
The Fed will also release a new set of economic projections on Wednesday, including a revised dot plot of officials’ forecasts for the federal funds rate.
Growth forecasts for the end of the year are also expected to be revised upwards, although those for inflation – minus volatility in food and energy prices – are revised downwards. The dot chart is expected to show officials’ support for another quarter-point rate hike this year, with some economists thinking it could also show fewer rate cuts in 2024 as the Fed pledges to again to keep interest rates higher for longer.
“Even if things are moving in the right direction, they have to be wary of anything that might start to raise inflation expectations,” said Peter Hooper, a Fed veteran now at Deutsche Bank.
“They fully recognize that to complete the job, they have to stay true to the message until they get a little closer.”