Federal Reserve Chairman Jerome Powell speaks during a news conference after the Federal Open Market Committee meeting on November 6-7, 2024, at the William McChesney Martin Jr. Federal Reserve Building in Washington, D.C., 2024 November 7th.
Andrew Caballero-Reynolds | AFP | Getty Images
Inflation remains above target, the economy is growing at around 3%, and the labor market remains strong. Taken together, this sounds like a perfect scenario for the Fed to raise interest rates or at least leave them unchanged.
However, that is unlikely to happen when the Federal Open Market Committee, the Fed’s rate-setting body, announces its policy decision on Wednesday.
Instead, futures market traders are almost certain that the FOMC will actually lower its benchmark overnight borrowing rate by a quarter of a percentage point, or 25 basis points. This would lower its target range to 4.25%-4.5%.
Even if market expectations are high, the decision is likely to come under unusually close scrutiny. one CNBC investigation The study found that while 93% of respondents said they expected a rate cut, only 63% said it was the right thing to do.
“I would be inclined to say ‘no rate cut,'” former Kansas City Fed President Esther George told CNBC on Tuesday.scream box“Interview. “Let’s wait and see how the data goes. Twenty-five basis points wouldn’t normally determine where we are now, but I do think now is the time to signal to markets and the public that they haven’t taken their eye off the inflation ball just yet. “
Inflation does remain a headache for policymakers.
Although the annual growth rate has declined significantly from the 40-year peak in mid-2022, has been hovering in the range of 2.5%-3% Most of 2024. The Fed has set an inflation target of 2%.
The Commerce Department is expected to release a report on Friday saying personal consumption expenditures price indexThe Fed’s preferred inflation gauge rose to 2.5% in November, with the core reading excluding food and energy at 2.9%.
Justifying a rate cut in this environment will require some smart communication from the chair Jerome Powell and committee. Former Boston Fed President Eric Rosengren also recently told CNBC that he would not cut interest rates at this meeting.
“They’re very clear about what their goals are, and when we look at the inflation data, we see that inflation has not continued to decelerate as much as it has,” George said. “So I think it’s a matter of us being cautious and thinking hard about how much we need to go. Reasons why loose policies can keep the economy on track.”
Fed officials who support a rate cut say policy doesn’t need to be as stringent in the current environment and they don’t want to risk damaging the labor market.
The possibility of a “hawkish interest rate cut”
If the Fed continues to cut interest rates, the federal funds rate will fall by a full percentage point since September.
While this is significant short-term easing, Fed officials have tools at their disposal to let markets know that future rate cuts won’t be easy.
One of these tools is a dot-plot matrix of individual members’ interest rate expectations over the next few years. The report will be updated on Wednesday along with the rest of the summary of economic forecasts, which includes unofficial outlooks for inflation, unemployment and gross domestic product.
Another is the use of guidance in post-meeting statements to indicate where the committee believes policy is headed. Finally, Powell could use his press conference to provide further clues.
The market will be watching Powell’s talks with the media most closely, followed by the dot plot. Powell recently said that with what he described as a “strong” economy, the Fed “can be more cautious about the pace of easing.”
“We’re going to see the direction they tend to go and start to raise their inflation forecasts,” said Vincent Reinhardt, chief economist at BNY Mellon and former director of the Fed’s monetary affairs department. 24 years at the Fed. Year. “The points (will) move up a little bit, and (will) at the press conference people are preoccupied with the idea of skipping the meeting. So it’s going to be a hawkish cut in that regard.”
What about Trump?
Powell will almost certainly be asked about how fiscal policy might be positioned under President-elect Donald Trump.
So far, the chairman and his colleagues have ignored questions about the bill. Trump’s moves could have implications for monetary policy, Citing the uncertainty of what is now just talk and what will become reality in the future. Some economists believe the incoming president’s plan for aggressive tariffs, tax cuts and mass deportations could further fuel inflation.
“Clearly the Fed is in trouble,” Reinhart said. “We used to call it the trapeze problem. If you were a trapeze artist, you wouldn’t leave your platform until you were sure your partner was thrown off. For central banks, they can’t really leave your platform.” According to them think what will happen in the political economy changes their predictions until they are very sure that these changes in the political economy will happen. “
“One of the main concerns at the press conference was the idea of missing the meeting,” he added. “So I think it’s going to be a hawkish easing in that regard. As (Trump’s) policies actually come into place, they’re likely to adjust their forecasts even more.”
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Most Wall Street forecasters believe Fed officials will raise inflation expectations and lower expectations for a rate cut in 2025.
When the dot plot was last updated in September, officials said it would be cut by four and a quarter percentage points next year. Markets have scaled back their own easing expectations, with two rate cuts expected in 2025 following this week’s action, according to CME Group’s FedWatch indicator.
The Fed is also expected to skip its January meeting. Wall Street does not expect any changes to the statement after the meeting.
Officials are also likely to increase their estimates of a “neutral” rate that neither promotes nor constrains growth. This level has been around 2.5% for years – 2% inflation plus 0.5% at the “natural” level of interest rates – but has risen in recent months and could be breached in this week’s update 3%.
Finally, the Committee may adjust the interest paid on overnight repurchase operations by 0.05 percentage points in response to a situation where the federal funds rate approaches the bottom of the target range. The “ON RPP” interest rate, as the lower limit of the funding rate, is currently 4.55%, while the effective funding rate is 4.58%. Minutes from the November Federal Open Market Committee (FOMC) meeting showed officials were considering a “technical adjustment” to interest rates.
