U.S. Federal Reserve set to hold interest rates at 22-year high as inflation persists

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10th December 2023 – (Washington) The U.S. Federal Reserve is expected to maintain its current interest rates for a third consecutive meeting, as it continues its efforts to combat high levels of inflation. Financial markets are widely anticipating this decision, leading traders and analysts to speculate on when the central bank will begin cutting interest rates and at what pace.

While it is almost certain that there will be no rate hike, there is uncertainty surrounding how the Fed will shape its policy outlook for the coming year. Gregory Daco, Chief Economist at EY, stated that the Fed is engaged in a “battle for optionality,” where policymakers maintain the possibility of another rate hike if deemed necessary.

This approach sets the Fed apart from other central banks, such as the European Central Bank, whose policymakers have expressed support for ending rate hikes due to a significant decline in inflation. Recent economic data from the US indicates low unemployment, robust job creation, positive economic growth, and a decrease in inflation. The latest consumer price index (CPI) revealed an annual inflation rate of 3.2%, down from a pandemic-era peak of 9.1%.

The positive data has raised hopes that the Fed can achieve its dual mandate of lowering inflation to its long-term target of 2% while addressing unemployment, without pushing the world’s largest economy into a recession. This achievement, known as a “soft landing,” holds significance for President Joe Biden, who will seek reelection in 2024.

Market futures reflect a high probability, over 98%, that the Fed will maintain its current rates in the upcoming decision. However, there is less certainty about future actions. Economists at Deutsche Bank predict interest rate cuts of 1.75 percentage points in 2024, significantly higher than the Fed’s forecast of only half a percentage point. Traders are pricing in around 1.25 percentage points of rate cuts in 2023, starting in March.

Gregory Daco suggests that the Fed will implement a one-percentage-point interest rate cut in 2024, beginning in May. On the other hand, analysts at Barclays anticipate a more conservative approach, with the Fed remaining on hold until December 2024 before implementing cuts at every-other-meeting.

Alongside the interest rate decision, the Fed will release a quarterly update of its summary of economic projections (SEP), followed by a press conference by Fed Chair Jerome Powell. The SEP will provide analysts and traders with a better understanding of policymakers’ perspectives on economic growth, inflation, unemployment, and interest rate cuts.