As the US Federal Reserve gears up for its final two-day meeting of 2023 on Tuesday (Wednesday AEDT), chairman Jay Powell finds himself in a complex situation. Powell is navigating a nuanced economic landscape — the US job market shows resilience and consumer spending remains robust but there are indications of decelerating growth and potentially easing inflation.
The Federal Reserve is expected to hold interest rates steady for the third consecutive meeting, keeping the federal funds rate at a 22-year peak of 5.25-5.5%.
Despite the pause — in place since July — the Fed has not indicated that rates have reached a level that is adequate to reduce inflation to the 2% target. Any discussions on the conditions for a rate cut next year have not been made public.
Investors, however, seem sceptical of Powell's caution against further monetary tightening, believing the US economy's slowdown might eliminate the need for additional rate hikes. This perception has eased financial conditions, potentially undermining the Fed's efforts to temper demand.
A tricky situation
Ellen Meade, former senior adviser to the Fed’s board of governors and now at Duke University, highlights the tricky situation, noting the Fed's reluctance to communicate a potential end to rate hikes.
At the upcoming press conference, Powell is expected to reassert that it's too early to signal a policy shift, with the central bank proceeding "carefully" in its future decisions.
The Fed will also release economic projections, which will be scrutinised for any indication of interest rate cuts. Economists predict the central bank will retain its current statement, continuing to outline the criteria for additional policy firming.
September projections indicated a peak federal funds rate of 5.5-5.75% this year, with a reduction of half a percentage point in 2024. Economists are keen to see if more cuts are projected for next year.
Matthew Raskin from Deutsche Bank (ETR:DBKGn) and Constance Hunter at MacroPolicy Perspectives emphasise the Fed's need to manage its signals carefully. Deutsche Bank forecasts a 1.75% cut in the policy rate starting June next year, while Morgan Stanley (NYSE:MS) expects a 1% reduction over 2024.
Powell, in his last public appearance before this meeting, implied a data-driven approach to the next phase of inflation control. The Fed aims to reach a neutral stance as swiftly as the inflation data allows, recognising that the full impact of policy decisions has yet to unfold.