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What to watch for in the Federal Reserve’s policy announcement

What to watch for in the Federal Reserve’s policy announcement
What to watch for in the Federal Reserve’s policy announcement

washington d.c.

The Federal Reserve is set to make history again on Wednesday, approving a fourth consecutive three-quarters percentage point rate hike as part of an aggressive battle to drive down the white-hot inflation plaguing the US economy.

The oversized hike would take the central bank’s benchmark lending rate to a new target range of 3.75% at 4%. This is the highest federal funds rate since January 2008.

Wednesday’s decision, which comes at the end of a two-day Federal Open Market Committee policy meeting, would also mark the Fed’s toughest policy decision since the 1980s and will likely add to the economic pain of millions of businesses. and US households by pushing up the cost of borrowing even more. There is also a chance that it could trigger a recession.

While Fed Chairman Jerome Powell stressed that persistent and entrenched inflation would cause greater economic pain than a recession, he also acknowledged the economic difficulties resulting from the tightening of monetary policy.

“I wish there was a painless way to do this. There is none,” he said in September.

Here’s what to watch out for: According to the CME tool Fedwatch, traders estimate there is nearly a 90% chance of a three-quarters percentage point rate hike this month. That means investors have already focused on the December meeting, which they believe will be when the central bank begins to reverse its hawkish policy.

They will be watching Powell’s press conference after the meeting closely to see if he lays the groundwork for a reduction in the pace of rate hikes. “It could do this by acknowledging the slowdown in the real economy already underway and highlighting the lags between slowing economic activity and waning price pressures,” wrote Michael Pearce, senior economist at Capital. Economics, in a note to clients.

Recent data only underscores the “choose your own adventure” aspect of the US economy: Mortgage rates at levels not seen in nearly 20 years are beginning to stifle the housing market. New home sales fell 10.9% in September from August and 17.6% from a year ago.

However, some inflationary pressures are easing. Wages and salaries rose 1.2% in the third quarter, against 1.6% in the second, according to the employment cost index.

And through it all, the labor market has remained tight. Job postings rose unexpectedly in September, indicating that there are 1.9 job postings for every available worker. Friday’s next jobs report is expected to show the economy added another 205,000 jobs in October, down from last month but still at an all-time high.

Looking forward: Wednesday’s policy announcement and the press conference immediately following will be closely scrutinized for any potential forward guidance from the Fed.

“A 75 basis point hike from the Fed this week is pretty much done. The much bigger question is how the Fed signals its future policy trajectory,” wrote Luke Bartholomew, senior economist at abrdn, in a note.

“The challenge for the Fed is to signal a slowdown without letting the market develop a narrative of the Fed ‘pivoting’ away from its current priority of cooling underlying inflationary pressures,” he wrote.

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