The central bank is set to slow rate hikes
It is predicted that Federal Reserve will slow its interest rate hikes at the end of its two-day policy meeting on Tuesday and Wednesday. The latest inflation data published Tuesday shows that consumer prices have lowered faster than expected.
The consensus estimate is that the central bank to raise its benchmark interest rate by 50 bps to a new range of 4.25% and 4.5%, which will be the highest level since December 2007. Market participants will also watch the press conference Chair Jerome Powell held a half hour after the announcement.
Like most major central banks around the globe, the Fed is walking a fine line between raising rates to control inflation but not too much to cool strop growth. After four 0.75% rate hikes, it now seems reasonable to slow down and wait to see the previous step's effect on the economy, as it takes time to see how much those increases hit the economy in the coming months.
It will be hard for Fed to ignore Tuesday's inflation numbers. In October, it was the first month that inflation eased faster than estimates, but repeating the same thing for the second straight month, will make it unreasonable not to pay attention to it. US headline inflation, which includes all categories, rose 7.1% annually in November. Furthermore, inflation, excluding volatile food and energy, rose by only 6% (Annually) in November.
Meanwhile, fresh forecasts are set to show a higher peak interest rate for 2023, which is essential for traders and investors. So make sure to follow the Fed's updates of economic forecasts, which include officials' expectations for interest rates over the next several years. In addition, we should see how long the Fed is planning to hold the rates at peak. Most analysts believe Fed officials have already socialized the idea of rates settling near 5% before the central bank ends this tightening cycle, which could get as high as 5.25%.
On the other hand, to see rates above 5%, we should see the economy at a strong enough level not to enter a recession. Nevertheless, markets are pricing in rate cuts starting in the second half of next year. Besides announcements, the Fed chair press conference will also be essential to see how Powell squares those tensions during the Q&A with reporters.
Expecting how Fed's decisions affect the markets will be challenging, but generally, we can say that markets are optimistic about their effects. From the technical point of view, as you can see below, SP500 rose sharply after Tuesday's inflation data. Even though we saw a correction a few hours later, as you can see, it is increasing again as we get closer to the Fed announcement release.
