The Federal Reserve is set to keep its interest rate steady after central bank officials convene this week to discuss progress in bringing down inflation.
The Federal Open Market Committee will meet on Tuesday and Wednesday to decide whether to raise rates again. Fed leadership is careful to telegraph their moves so as not to spook markets, and the overwhelming majority of economists and Fed watchers expect that the central bank will hold off on tightening this time around.
INFLATION HOLDS STEADY AT 3.4% IN SEPTEMBER IN FED’S PREFERRED GAUGE
But the Fed, which has been raising rates for more than a year, is in a tough position. In order to stave off inflation, it has to keep rates high — but it doesn’t want to overtighten and knock the economy into a recession. After a year of straight declines in inflation, progress has not been as clear-cut in recent months.
Inflation in the consumer price index for the year ending in September punched in at 3.7%, matching the level it was the month before. On a month-to-month basis, inflation rose 0.4%, slightly higher than projected.
In the Fed’s preferred gauge, the personal consumption expenditures price index, inflation also held steady at 3.4% for the year ending in September.
Both of those numbers are still above the Fed’s 2% goal. Still, inflation is much lower than last year when it popped above 9%, showing meaningful progress.
The Fed has indicated it is taking a wait-and-see approach to future rate hikes, with officials like Fed Chairman Jerome Powell hinting that the Fed is going to keep rates where they are now unless indications emerge that inflationary growth is rearing its head again. Most investors also expect a pause this week.
“No rate hike is expected,” Greg McBride, chief financial analyst at Bankrate, told the Washington Examiner. “But I think we’ll otherwise hear a pretty familiar refrain — that the Fed is committed to price stability, that there still is a long way to go to get inflation to 2%, and that they will maintain the posture that allows them the flexibility to raise interest rates again if needed.”
Investors see about a 97% probability that the Fed will not hike rates at this coming meeting, according to the CME Group’s FedWatch tool, which calculates the probability using futures contract prices for rates in the short-term market targeted by the Fed.
Investors place a 19% chance that the Fed raises rates before the end of this year — down from 40% just a month ago.
Before all FOMC meetings, there is a "media blackout" period in which Fed officials aren’t allowed to comment to the press. During his last speech before that blackout, Powell worked to reassure markets about the Fed’s course of action.
“Given the uncertainties and risks, and how far we have come, the committee is proceeding carefully,” Powell said earlier this month. “We will make decisions about the extent of additional policy firming and how long policy will remain restrictive based on the totality of the incoming data, the evolving outlook, and the balance of risks.”
While there was no indication of a rate hike after this coming meeting, Powell’s speech wasn’t entirely dovish and was seen more as balanced and cautious. He did suggest that the Fed could conduct more hikes down the line should the data indicate that inflation isn’t meaningfully falling.
“We are attentive to recent data showing the resilience of economic growth and demand for labor. Additional evidence of persistently above-trend growth, or that tightness in the labor market is no longer easing, could put further progress on inflation at risk and could warrant further tightening of monetary policy,” he said.
McBride said the only data that has come in during the media blackout that is perhaps a bit surprising to the Fed is the red-hot gross domestic product report for September, which dropped on Thursday.
Economic growth accelerated to a 4.9% seasonally adjusted annual rate in the third quarter of this year, up from 2.1% the quarter before, the Bureau of Economic Analysis reported. That was above the expectations of economists who were forecasting a still strong 4.2% increase.
“Economic growth transitioned from resilience to reacceleration this quarter, defying the Federal Reserve’s aggressive tightening cycle and tighter financial conditions,” said Olu Sonola, head of U.S. economics at Fitch Ratings. “The strength of consumer spending and the boost to growth from government spending does not make the Fed’s job easier over the coming quarters.”
The Fed itself released its own economic projections following its last huddle in September.
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It now predicts the unemployment rate will be at 3.8% by the end of this year, the same rate as today. That is slightly lower than the Fed’s June estimate that the economy would close the year facing 4.1% unemployment.
Fed officials now see inflation, as gauged by the PCE index, at 3.3% by the end of the year, compared to a June projection of 3.2%.