The Federal Reserve is widely expected to hold interest rates steady Wednesday afternoon while also leaving the door open on future actions to bring down inflation.
Many economists and Fed watchers expect officials to pencil in one more rate hike before moving into an extended pause.
“I think the market is correct in expecting the Fed to skip this meeting” and “maintain its vigilance,” Marvin Loh, State Street senior global macro strategist, told Yahoo Finance Tuesday. The Fed, he added, will keep “optionality for another hike before they are done with the tightening process.”
Rates now stand in the range of 5.25%-5.5%, following 11 rate hikes since March 2022, the most aggressive action from the central bank to tackle inflation since the 1980s.
Read more: What the Fed rate decision means for bank accounts, CDs, loans, and credit cards
But while many expect just one more rate hike, the bigger question may be how long will the Fed stay on hold at elevated levels. Will officials still see 100 basis points of rate cuts next year or will there be fewer rate cuts projected, implying rates will remain higher for longer?
“They might signal they are not going to cut as aggressively going into next year,” Loh added. “So this higher-for-longer message is probably where we are starting to see concerns around interest rates being …higher over the last couple of days and a little bit of volatility within the equity markets as of late.”
Fed Chair Jerome Powell is likely to note up front that the job is not done on inflation and the Fed will stay the course in order to get inflation back to 2%.
Powell is also likely to reiterate his message from Jackson Hole that the Fed is “in a position to proceed carefully” as it mulls future actions, while also leaving rate hikes squarely on the table.
“One thing I will give Powell and company credit for is they have guided the markets pretty well up to now,” Kevin Flanagan, WisdomTree’s head of fixed Income strategy, told Yahoo Finance.
Investors will get a new set of economic projections as well that could revise inflation forecasts down and GDP higher given data suggesting that prices are cooling and the economy remains resilient.
The Fed’s preferred inflation measure — the Personal Consumption Expenditures (PCE) Index that excludes the cost of food and energy, or so-called “core” PCE — rose 4.2% over the prior year in July, up from 4.1% in June but down from the range of 4.5%-4.6% for the first half of the year.
Another gauge of inflation — the Consumer Price Index on a “core” basis — rose 4.3% in August, slowing from 4.7% in July, its slowest pace since October 2021.
The Fed will announce its monetary policy decision at 2:00 p.m. ET Wednesday followed by a press conference with Powell at 2:30 pm ET.
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