The US Federal Reserve is likely to hold steady on monetary policy at its rate-setting meeting this week, even as inflation remains well above target, the economy continues to grow at a robust pace and the job market remains short of labor supply.
Investors and market watchers predict the Federal Open Market Committee (FOMC) on Nov. 1 will again keep its benchmark federal funds rate in the current range of 5.25% to 5.5%, where it has been since July. Fed officials will probably leave interest rates at elevated levels until inflation shows a meaningful move down, though there is still some chance of another hike before the end of the year.
“The Fed doesn’t want to communicate that it might ease policy before inflation is firmly back near the 2% target,” said Kathy Jones, managing director and chief fixed income strategist for the Schwab Center for Financial Research. “After the last meeting, some Fed officials indicated that they believe enough has been done, but [Fed Chairman Jerome] Powell probably won’t want to give up the option to hike more if the Fed believes it’s necessary.”
Inflation remains stubborn
The personal consumption expenditures index excluding volatile food and energy prices, the Fed’s preferred measure of inflation, increased 3.7% from September 2022 to September 2023, the smallest annual growth since May 2021, the US Bureau of Economic Analysis reported Oct. 27.
Annual growth of this measure of inflation peaked in February 2022 at 5.6%, but it has not dropped sharply since the Fed began hiking rates, falling by an average of just 10 basis points each month since the first hike in March 2022. Fed officials want personal consumption expenditures minus food and energy to grow at around 2% annually.
Stubbornly elevated prices have provoked a “higher for longer” message from Powell and other central bank officials, which has caused a sell-off in government bonds that shows few signs of ending before any rate cuts begin.
“Powell can’t deviate from ‘higher for longer’ until inflation is closer to the Fed’s 2% target,” said Michael O’Rourke, chief market strategist at JonesTrading. “It is premature for any shift.”
Along with persistently high inflation, gross domestic product increased at an annual rate of 4.9% in the third quarter, the highest since the end of 2021. The US unemployment rate was at 3.8% in September, only slightly above its pre-pandemic level.
Rate hikes over?
While the economy remains hot, the futures market does not expect another rate hike this year. The odds of a rate hike before the end of this year were less than 20% on Oct. 27, according to the CME FedWatch Tool, which measures investor sentiment in the Fed funds futures market.
“At this juncture, it very likely the FOMC is done raising rates,” said O’Rourke with JonesTrading. “There was enough disappointing earnings guidance to believe the economy should start showing signs of slowing.”
The Fed’s Nov. 1 decision will follow the European Central Bank’s decision on Oct. 26 to hold its benchmark deposit rate at 4%.
The Bank of England, which paused rate hikes in September, is also expected to hold interest rates firm after its meeting Nov. 2. The central bank is forecast to keep its benchmark interest rate at 5.25%, a 15-year high.
Though central bank decisions are aligning, non-US actions have little sway on the Fed’s path forward, said Michael Hewson, chief market analyst with CMC Markets.
“The Fed will do what it always does, set monetary policy for the US economy,” said Hewson. “It’s not influenced by other central banks, it’s more a case of the other way round. If the Fed is on hold it reduces the likelihood that the ECB or Bank of England will need to hike further.”
The Bank of Japan will meet Oct. 31, but it remains unclear what policy change, if any, will come out of that meeting. Japanese monetary policymakers have held interest rates in slightly negative territory and capped 10-year government bond yields in an effort to stimulate economic growth.
With the exception of the Reserve Bank of Australia and Sweden’s Riksbank, central banks worldwide appear to be done raising rates, potentially bringing the end of global monetary policy tightening, said Edward Moya, a senior market analyst with OANDA.
“Geopolitical risks are complicating the outlook, but it seems slowing growth will do the trick for helping most central banks hit their respective inflation targets,” Moya said.
Credit: Source link
