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HomeWorld USHere's what to expect from the Federal Reserve's meeting on Wednesday.

Here’s what to expect from the Federal Reserve’s meeting on Wednesday.

WASHINGTON, DC – JUNE 21: Federal Reserve Chairman Jerome Powell testifies before the House Committee on Financial Services on June 21, 2023 in Washington, DC. Powell testified during the hearing on the Federal Reserve’s semi-annual monetary policy report. (Photo by Win McNamee/Getty Images)

Win Mcnamee | Getty Images News | Getty Images

Despite the improving inflation picture, the Federal Reserve on Wednesday will approve what would be the 11th rate hike since March 2022.

Investors hope it will last for a long time.

Markets are pricing in a near certainty that the Fed will approve a quarter-percentage point hike that would push its benchmark borrowing rate to a target range of 5.25%-5.5%. That would raise the upper limit on the federal funds rate to the highest level since January 2001.

More important will be whether officials at the Federal Open Market Committee feel they have gone far enough or if there is still more to do in the fight against inflation.

“Maybe this will signal, yes, we’re hiking, but then we think we can sit here for a while and watch,” said Kathy Jones, chief fixed-income strategist at Charles Schwab. “But no promises. They can’t leave the option.”

Indeed, the Fed’s course is far less certain. Central bank policymakers almost unanimously believe that inflation is too high, but further hikes from here pose risks to an economy that many believe is headed for at least a mild recession.

‘The Fed should be done’

The markets, though, don’t seem to mind. Wall Street has been on a tear all year, with the Dow Jones Industrial Average jumping more than 5% over the past month alone. That may be because traders are ignoring the Fed’s rhetoric and pricing, with just a 35 percent chance of another hike before the end of the year. CME Group’s FedWatch Estimation of futures market prices.

One key from the meeting will be whether Fed Chairman Jerome Powell indicates that, at the very least, the FOMC will hold off on another hike at its next meeting in September while it analyzes how previous hikes have affected the economy. Powell has said the Fed is not locked into an every-other-meeting pattern of hikes, but has indicated a slower pace of hikes is likely.

“The increase that is going to happen. [Wednesday] unnecessary, and maybe the last couple were unnecessary,” said Luke Tilley, chief economist at Wilmington Trust Investment Advisors. “By the time we get to November, it’s going to be even more obvious.”

History repeats itself

Fed policy, though, has been informed by a belief that when it comes to fighting inflation, it’s better to do too much than too little. The current price competition is the most intense that the United States and many other developed nations have faced since the early 1980s.

That last period is also behind a lot of Fed thinking, particularly on how policymakers quickly left the inflation fight behind and faced an even worse problem.

“It’s easy for me to say I think they’re going too far,” Tilley said. “But I’m also quick to say that if I were in their seats, I’d probably be doing the same thing because they’re really playing the risk management game.”

That game is by now familiar: retreating too soon from the fight against inflation could lead to a repeat of the high prices and weak growth of the early 1980s, while going too far could send the country into recession.

Recent indicators suggest that credit conditions are tightening significantly, with higher interest rates and tighter lending standards being critical to future growth.

“Powell will likely welcome several more months of moderate inflation data before ending the hiking cycle with confidence,” Citigroup economist Andrew Hollenhorst said in a client note. “We don’t think the US economy is headed for a soft landing. After expected moderate core inflation data in the summer, we see downside inflation risks re-emerging in the fall.”

Similarly, Steven Blitz, chief U.S. economist at Globaldata.TSLombard, said “talk of rising debt and a soft landing” at Wednesday’s meeting would be a mistake for the Fed.

“Planes land, economies don’t. Economies are an ongoing dynamic, and no recession would be more troubling for the Fed,” Blitz wrote. “The economy is headed for recession, but if it is somehow averted, the momentary disinflation will prove to be momentary, as will the Fed’s confidence that they are at the end of this hiking cycle.”


Source by [CNBC News]



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