Yahoo Finance: The Fed will raise the rate by 75 basis points, and then "will lay the ground for a step-down"

Source: Yahoo Finance

Author: Jennifer Schonberger

Article: Original article

Publication date: Tuesday, November 1, 2022

The Federal Reserve is anticipated to increase its benchmark interest rate by three-quarters of a percentage point for the fourth consecutive meeting on Wednesday, after two days of meetings of the Federal Open Market Committee.

Thereafter, markets expect the central bank to abandon its hawkish position on reducing inflation and loosen the pace of rate hikes unless the data continues to demonstrate persistently high inflation.

Michael Pearce, senior US economist at Capital Economics, wrote in a note to clients that they expect Jerome Powell to use the press conference after the Fed meeting “to lay the ground for a step-down in the pace of rate hikes”. He also added that the head of the Fed could do this by acknowledging the slowdown in the real economy already taking place and emphasizing the lags between the slowdown in economic activity and easing of price pressures.

According to the minutes of the meeting, some officials at the September meeting considered that the central bank may at some point slow down the pace of rate hikes and assess the impact of previous rate hikes on inflation.

Since interest rates rise above the neutral level — a level that does not stimulate or slow down economic growth — Pierce expects Fed officials to talk about balancing rate hikes to keep inflation down with the risk of too high a rate increase and accelerating the recession.

San Francisco Fed President Mary Daly recently suggested that the Fed slow down the pace of rate hikes. She said that the Fed should be talking about retiring at some point when inflation data show signs of decline.

At a meeting of the University of California, Berkeley's Fisher Center for Real Estate & Urban Economics' Policy Advisory Board last week, Daly declared that “we might find ourselves, and the markets have certainly priced this in, with another 75-basis-point increase.” She added that she would recommend not thinking that this 75-basis-point increase forever.

The data seems to point to signs that domestic demand is declining due to higher interest rates. Final sales to private domestic buyers, a measure of consumer and business spending used to gauge underlying demand in the economy, increased by 0.1% year-on-year in the third quarter after 0.5% rising in the second quarter and 2.1% in the first quarter.

The labor market is also cooling: the number of vacancies fell sharply in August, and the number of people laid off from work tends to decrease, while fewer new jobs appear every month. Economists predict Friday's employment report will show 200,000 non-farm jobs were created in October, down from 263,000 jobs created in September and down from a monthly average of 420,000 in 2022.

There are also signs on the surface that inflationary pressures are easing. The employment cost index showed that wages in the private sector increased by 1.2% in the third quarter compared with 1.6% in the second, resulting in an annual growth rate decreased from 5.7% to 5.2%.

In a research note to clients, Michael Gapen, an analyst at Bank of America, wrote that the November FOMC meeting is not related to the November interest rate decision. The meeting will be devoted to the guidance on the policy rate in the future and what to expect in December and beyond.

The Fed predicts that interest rates will have to rise to 4.5-5% next year in order to reduce inflation to the 2% target set by the central bank. Once the policy rate reaches the level that the Fed believes is sufficiently restrictive, it will maintain this level for "some time" until there is "convincing" evidence that inflation will return to 2%.

Luke Tilley, chief economist at Wilmington Trust, told Yahoo Finance that the PCE and GDP data signal a move towards a slowdown of up to 50 basis points by the December meeting. In addition, he added that there is a possibility of a slowdown to 25 basis points, but this will depend on the data. Luke Tilley expects to hear from Jerome Powell formulations that can direct the market to slow down.

Forecast:

After the end of the Fed meeting and the publication of minutes on November 3, the pair is likely to move up. We are closely monitoring the releases of the regulator and are preparing to buy the EURUSD pair.