The Federal Reserve is widely expected to raise its benchmark interest rate by three-quarters of a percentage point for the fourth straight meeting on Wednesday after two days of Federal Open Market Committee meetings.
And after that, markets expect the central bank to abandon its hawkish stance to lower inflation and slow the pace of rate hikes unless data continue to show stubbornly high inflation.
“We expect Chairman Jerome Powell … to use the post-FOMC press conference to lay the groundwork for a step down in the pace of rate hikes,” Capital Economics senior U.S. economist Michael Pearce wrote in a note to clients. “He could do so by acknowledging the slowdown in the real economy that is already underway and stressing the lag between slowing economic activity and weakening price pressures.”[ads1];
Some officials believed at the meeting in September that the central bank could slow the pace of interest rate increases at some point and assess the impact of previous interest rate increases on inflation, according to the minutes of the meeting.
Pearce says that when interest rates rise above a neutral level — a level that neither spurs nor slows economic growth — he expects Fed officials to talk about balancing raising rates to cool inflation with the risk of raising rates too high and triggering a recession .
San Francisco Fed President Mary Daly recently laid the table for the Fed to slow the pace of rate hikes, saying the Fed should talk about “tapering” at a time when inflation data shows signs of slowing.
“We may find ourselves, and the markets have certainly priced this in, with another 75 basis point increase,” Daly said at a meeting of the University of California, Berkeley’s Fisher Center for Real Estate & Urban Economics’ Policy Advisory Board recently. week. “But I would really advise people not to take it away and think it’s 75 forever.”
Data appear to point to signs that domestic demand is being squeezed by higher interest rates. Final sales to private domestic buyers – a measure of consumer and business spending used to assess underlying demand in the economy – rose at a 0.1% annual rate in the third quarter after rising 0.5% in the second quarter and 2 .1% in the first quarter.
Imports fell in the third quarter by almost 7%, suggesting weak consumer spending.
The labor market is also cooling, with vacancies falling sharply in August, and the proportion leaving jobs trending lower while fewer new jobs are being created on a monthly basis. Economists forecast Friday’s jobs report would show 200,000 nonfarm payrolls were created in October, a result that would be down from the 263,000 jobs created in September and down from the monthly average of 420,000 in 2022.
There are also signs beneath the surface that inflationary pressures are easing. The employment cost index showed private wages rose 1.2% in the third quarter, down from 1.6% in the second, pushing the annual growth rate down from 5.7% to 5.2%.
The Fed is also aware of the backlog in the accounting of rent in the consumer price index. While rents and owner-occupied rents continue to accelerate in official CPI data, Apartment List, a private provider of rent data, showed rent growth fell to 6% in October from a peak of 18%.
“It’s still too fast for comfort,” noted Pearce, “but the direction of travel is clear, strongly suggesting that a significant slowdown in CPI-shelter inflation is finally coming.”
Official measures of inflation are not slowing as quickly as officials hope. The Fed’s preferred measure of inflation — the consumer price index (PCE) excluding volatile food and energy prices — rose 5.1% in September and 6.2% on a headline basis. That’s down from 7%, but still far from the Fed’s 2% inflation target. And the consumer price index — excluding volatile food and energy prices, a stickier measure of inflation — rose 6.6% in September, accelerating from 6.3% in August and 5.9% in July.
“The November FOMC meeting is not about the policy rate decision in November,” Bank of America analyst Michael Gapen wrote in a research note to clients. “The meeting is instead about future policy rate guidance and what you can expect in December and beyond.”
The Fed estimates that interest rates will need to rise to between 4.5% and 5% next year to bring inflation down towards the central bank’s target of 2%. When the key rate reaches what the Fed believes is a sufficiently restrictive level, it would maintain that level for “some time” until there was “persuasive” evidence that inflation was on the way back to 2%.
“The PCE, GDP data all point in the direction of the decline to 50 basis points for the December meeting,” Wilmington Trust Chief Economist Luke Tilley told Yahoo Finance. “There is even the possibility of slowing more to 25 basis points depending on the data. I expect language from Chairman Powell guiding markets toward a decline.”
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