Fed Expected to Hold Rates Steady But Further Hikes Loom as Inflation Persists

The Federal Reserve concludes its two-day November policy meeting on Wednesday, with broad expectations that the central bank will hold interest rates unchanged this time but potentially signal additional hikes ahead as it fights stubborn inflation. The Fed’s policy statement and Chair Jerome Powell’s press conference will offer critical clues on the future path of rates.

Markets widely anticipate the Fed maintaining its current target fed funds rate range of 5.25% to 5.50%, following four straight 0.75 percentage point increases. However, the Fed’s commitment to restoring price stability means further tightening can’t yet be ruled out with inflation still running hot.

The policy decision will be announced at 2 p.m. ET, followed by Powell’s press conference at 2:30 p.m. While rates are seen on hold today, the Fed chief’s tone and guidance will shape expectations on whether additional hikes are forthcoming or if a pause is imminent.

Balancing a Resilient Economy With Ongoing Inflation Fight

In recent remarks, Powell has signaled the Fed may be nearing the end of its aggressive tightening campaign as it tries to cool demand and tame the highest inflation in 40 years without triggering a recession. However, he’s also stressed the Fed’s work is far from done with consumer prices well above its 2% target.

“We still have some ways to go and incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected,” Powell noted at his September press conference. Markets expect rates to peak around 5% in early 2023 compared to prior forecasts for 4.5% to 4.75%.

The Fed faces a tricky balancing act heading into Wednesday’s decision. Recent data shows surprising economic resilience that may enable more Fed tightening to crush inflation. But risks of a downturn are rising, perhaps arguing for a more cautious stance.

Consumer spending has remained solid as the job market stays strong. However, manufacturing has weakened sharply amid rate hikes designed to cool demand. The housing market has slowed significantly as mortgage rates have spiked.

Inflation Shows Some Progress But Remains High

On the inflation front, the Fed has made some tangible progress in lowering price pressures from 40-year highs. The Personal Consumption Expenditures (PCE) index, the Fed’s preferred gauge, dipped to 6.2% annually in September from 6.3% in August and a peak of 7.3% in June.

But inflation remains well above the Fed’s 2% goal. “While recent data suggest some progress, we have a long way to go in restoring price stability,” Powell reiterated last month. Another 75 basis point hike remains possible at the December policy meeting if upcoming inflation reports remain stubbornly hot.

The October Consumer Price Index (CPI) due next week will provide a timely update on price trends. Cooling inflation levels could give the Fed confidence to slow rate hikes starting in December. But further evidence of persistent inflation would likely lead to more tightening.

Eyes on Economic Projections and Powell’s Tone

While rates are seen on hold Wednesday, the focus will be on updated economic projections, the Fed’s view of appropriate future policy, and Powell’s press conference. Markets hope for hints that the end of the tightening cycle may be near given increased recession risks.

However, Powell will likely stress that the inflation fight is far from over. “They will likely remain resolute in their inflation task until they actually start seeing the ‘whites of the eyes’ of disinflation,” noted Deutsche Bank’s chief U.S. economist.

With mounting concerns over a policy mistake, the Fed hopes to engineer a soft landing where inflation gradually returns to target without severe economic damage. But pulling off this outcome poses a major challenge. The November meeting offers critical clues into policymakers’ thinking on their steep rate hike path and outlook.

The Fed’s guidance on Wednesday will shape expectations around whether the central bank can realistically soon pause its tightening push or if additional hikes are in store, potentially at a slower pace. The statement and Powell’s comments will drive market reactions and the economic outlook heading into 2023.

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