The central bank will delay rate hikes at its last meeting of 2022

The Federal Reserve is expected to slow the pace of its torrid rate hikes when it concludes its two-day policy meeting on Wednesday as consumer prices have shown signs of cooling for two months in a row.

The central bank is expected to raise its benchmark interest rate by half a percentage point to a new range of 4.25% and 4.5%, the highest level since December 2007.

The Fed will announce its final policy decision Wednesday at 2 p.m. ET, with a press conference from Chairman Jerome Powell set to begin half an hour later.

The move will usher in a slower phase of rate hikes, after the central bank raised the target range for its benchmark interest rate by 0.75% basis points in each of its last four policy meetings.

Fed Chairman Jay Powell set the table for a 50 basis point rate hike last week, saying in a speech: “It makes sense to moderate the pace of our rate hikes as we approach the level of restraint that will be enough to do inflation. valleys. “

WASHINGTON, DC - NOVEMBER 30: U.S. Federal Reserve Chairman Jerome Powell studies notes as he speaks before the Brookings Institution, November 30, 2022 in Washington, DC.  Powell discussed the economic outlook, inflation and the job market.  (Photo by Drew Angerer/Getty Images)

Jerome Powell, Chairman of the US Federal Reserve, studies notes as he speaks before the Brookings Institution, November 30, 2022 in Washington, DC. Powell discussed the economic outlook, inflation and the job market. (Photo by Drew Angerer/Getty Images)

“The Fed has made it clear that they have changed a lot and because their actions take effect with a lag, they have to wait and be patient to see how much the rise bites the economy in the coming months,” said Tony Roth, chief investment officer at the Wilmington Trust. , said in an interview.

The Fed walks a fine line between raising rates too much and triggering a recession, but not raising rates enough to cool inflation.

However, there seem to be some encouraging signs of inflation.

Wednesday’s announcement comes just a day after US inflation data showed a slowdown in price increases for the second month in a row.

Core inflation, which excludes the more volatile food and energy components and is the Fed’s preferred way of measuring price pressures, rose 0.2% month-on-month in November and 6% year-on-year. In October, core inflation increased by 0.3% and 6.3% on a monthly and annual basis, respectively.

Headline inflation, which spans all categories, increased by 7.1% year on year in November.

“The Fed could reject a better-than-expected October [inflation] report as just one month of data, but the further slowdown in November makes this new disinflationary trend much harder to ignore,” Paul Ashworth, chief economist for North America at Capital Economics, wrote to clients on Tuesday.

Ashworth added: “Tuesday’s report provides strong support for our long-held view that mounting disinflation will soon persuade the Fed to sideline after an additional 25 basis point hike in early February.”

While the Fed may slow the pace of rate hikes, Powell and other officials have said interest rates will need to go higher than expected from September, suggesting rates could reach around 4.6% next year.

Since that meeting, Fed officials have socialized the idea of ​​interest rates approaching 5% before the central bank ends this current tightening cycle. On Wednesday, the Fed will release an updated set of economic forecasts, which will also include officials’ expectations for interest rates for years to come.

Roth told Yahoo Finance that he thinks rates will rise to about 5%, but could go as high as 5.25%.

“I don’t think it will be much higher because I think we will see a deterioration in consumer balance sheets and that will slow service inflation,” Roth said.

For the Fed to raise rates much more than 5%, Roth says the economy needs to stay strong and not slide into recession. Wages should also continue to grow on a positive basis around 2-3%, raising the prospect of a wage spiral, with higher prices leading to higher wages leading to even higher prices, according to Roth.

Fed officials have said they expect to keep interest rates at peak levels for “some time,” officials say. But how long is that?

John Williams, president of the New York Fed, does not see that happening until 2024. Nevertheless, markets are pricing in interest rate cuts from the second half of next year.

How Powell can resolve these tensions will be a major focus for investors on Wednesday.

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