The Fed is to raise rates again by 0.75%, but further steps will be softer

On Wednesday, the fourth meeting of the U.S. Federal Reserve (the Fed) will be held, within which yet another benchmark rate hike by 0.75% is expected.

Further, according to forecasts, the central bank might soften its so-called “hawkish” position and slow down the pace of hikes, but only under the condition that inflation doesn’t increase. 

Michael Pearce, senior U.S. economist at Capital Economics, expressed his hope that Jerome Powell, the Fed’s Chair, will prepare the ground for a gradual decrease in the rate-hike pace at the upcoming meeting. Pearce himself already sees some preconditions for this decrease, such as a slowdown in economic activity.

The protocol of the last meeting outlined the Fed’s intention to ease the pace of further monetary policy tightening in order to assess the impact of the previous rate changes on inflation.

In addition, Pearce highlighted the fact that rates might be balanced due to the risk of economic recession. It can occur in case of excessive increase above a neutral level of interest rates, which neither stimulates nor slows down the economic growth.

Michael Gapen, analyst at Bank of America, believes that the Fed’s meeting in November will be focused not much on the current rate size, but rather on the outlook for the end of the year and the following one as well.

At the moment, the Fed suggests that the rate will be around 4.5–5% in 2023. This level is likely to bring inflation back to the target of 2%. Once this level is reached, the rate won’t decrease immediately in order to maintain acceptable inflation until there is strong evidence that it will stop rising further.

The labor market is beginning to cool down in response to the Fed’s policy. The number of new vacancies decreased sharply in August, and it continues to decline from month to month. According to economists, the October report on employment, presented this Friday, will show about 200,000 available jobs, while in September this number was higher by 63,000. The monthly average of this year is also higher than the numbers registered in October by more than two times.

The employment cost index of the third quarter demonstrated that wages and salaries in the private sector have grown by 1.2% this year. In the second quarter, this growth was about 1.6%. As a result, the annual growth pace has also decreased by 0.5% down to 5.2%.

However, economists noted the weakening of inflationary pressure. As stated by Wilmington Trust Chief Economist Luke Tilley, the data on inflation and the country’s GDP indicated that the monetary policy tightening will slow down by December meeting, therefore, rates will rise only by 50 or even by 25 basis points.

At the upcoming Fed’s meeting, many expect Jerome Powell to signal the further easing of the monetary policy tightening pace.