Federal Reserve expected to pause again as inflation edges closer to its target

Federal Reserve expected to pause again as inflation edges closer to its target

WASHINGTON

The US Federal Reserve is widely expected to hold interest rates at a 22-year high for a third consecutive meeting on Dec. 13 as it continues to fight elevated inflation.

With the financial markets all but certain that another pause is coming, traders and analysts are now debating how soon the U.S. central bank will start cutting interest rates, and how rapidly it will then do so.

"The given is that there won't be a rate hike," EY Chief Economist Gregory Daco told AFP.

"But there's a lot of unknowns as to how the Fed will frame the policy outlook going into next year."

The Fed, which has a dual mandate to lower inflation to its long-term target of two percent while also tackling unemployment, has continued to keep the threat of another rate hike alive.

"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Fed Chair Jerome Powell said recently.

Daco from EY said the Fed is fighting a "battle for optionality" in which policymakers continue to insist that another interest rate hike could happen, "if deemed necessary."

This battle is putting the Fed at odds with other central banks like the European Central Bank, whose policymakers have voiced growing support for an end to rate hikes amid a steep decline in inflation.

Recent U.S. economic data point to low unemployment, resilient job creation, positive economic growth and falling inflation.

The latest consumer price index (CPI) showed an annual inflation rate of 3.2 percent, down from a pandemic-era peak of 9.1 percent.

The string of positive data has raised hopes the Fed will meet its dual mandate without plunging the world's biggest economy into a damaging recession - a rare feat in monetary policy known as a "soft landing."

In the futures markets, traders have assigned a probability of more than 98 percent that the Fed will sit tight at its next rate decision this week, according to data from CME Group.

While there is broad consensus over a December pause, traders and analysts are far less certain about what comes next.

"The discussion around a normalization of monetary policy will turn more active next year as progress on inflation continues further," economists at Deutsche Bank wrote in a recent note to clients.

They predict interest rate cuts of 1.75 percentage points in 2024 -- far higher than the Fed's recent forecast of just half a percentage point of cuts.