All eyes are on the Federal Reserve’s policy decision, and investors will especially closely watch Chair Jerome Powell’s speech for guidance on the bank’s interest rate path. The Fed’s two-day monetary policy meeting will end today at 18:00 GMT, with Powell’s speech at 18:30 GMT.
While markets don’t expect a change in the interest rates as the policy rate is expected to remain unchanged at the 5.25%-5.5% range, investors will turn their attention to the Fed’s assessment of the US economy. Market participants will scrutinise the policy statement and comments from Chairman Jerome Powell which may provide fresh clues regarding the next policy action. Although the revised Summary of Economic Projections (SEP) in September showed that a majority of policymakers favoured another rate hike before the end of the year, the CME Group FedWatch Tool points to a 73% probability that the Fed will remain on hold on policy in 2023.
If the Fed leaves the door open for one more rate hike, due to robust economic activity and a tight jobs market, then the USD will continue to strengthen and outperform its rivals. On the other hand, the USD may weaken if the Fed refers to cooling inflation and the recent increase in yields as evidence to stay on hold this year.
The Fed’s job has become more complicated
Just a few days before the Federal Reserve policy meeting, chair Jay Powell admitted that the central bank’s difficult job has become even more complex. He told an event in New York that “A range of uncertainties, both old and new, complicate our task of balancing the risk of tightening monetary policy too much against the risk of tightening too little.” He cited the ongoing conflict in the Middle East and the risk to the global oil markets, higher and long-term interest rates, and concerns about how fast inflation will ease.
Interest rate will remain at a 22-year high
The Federal Open Market Committee is anticipated to keep its benchmark interest rate at a 22-year high of 5.25-5.5%. This will allow policymakers to assess the health of the economy and the effect of past rate increases on consumer and business demand.
Market participants speculate that the Fed has perhaps reached the end of its rate-raising phase and will now focus on how long they should keep the current restrictive rates. With prices remaining elevated, officials have suggested that it may be too soon to rule out additional rate hikes even as they remain cautious.
While Powell and some governors are sceptical about further tightening, stressing the need for further evidence that economic growth is not slowing and that the disinflation has stopped or reversed, many economists have emphasised the need for further tightening.
As recently as September, policymakers anticipated one more quarter-point rate hike and fewer cuts next year. The “higher-for-longer” policy approach has generated a sharp sell-off in bonds and pushed borrowing costs higher, doing some of the work for the Fed. An increase in long-term yields equates to around one or two quarter-point rate rises, which could substitute for the final increase officials have forecast for their September meeting.
Former Fed governor Laurence Meyer said next year’s discussion would be tricky, as it would shift to the issue of the “duration” of higher rates than their level.
The task will be for Fed officials to adjust the fed funds rate in such a way that it doesn’t hurt the economy. With further economic data coming in, the central bank will have to tread carefully and calibrate the rates as inflation continues to moderate.