The Federal Reserve will downshift to a 25 basis point rise in its policy interest rate at their upcoming interest-rate meeting and will work overtime to make sure that the market doesn’t get the idea that rate increases are finished, economists said.
“Despite the good news on inflation and being one step closer to done, it’s likely too soon for the Fed to stop raising rates and likely too soon to signal a stop is imminent,” said Jonathan Pingle, economist at UBS.
In other words, “there could be one last hawkish sting in the tail,” added Paul Ashworth, chief North America economist at Capital Economics.
The sting will come from Fed Chairman Jerome Powell who will be “thinking very carefully about how not to send an inadvertently dovish signal,” agreed Jonathan Miller, senior U.S. economist at Barclays Capital.
Powell will hold a press conference at 2:30 p.m. Eastern on Wednesday, a half-hour after the Federal Open Market Committee announced its rate decision.
But it won’t be easy. Markets already seem to be celebrating the demise of inflation and the return of low interest rates.
The widely expected quarter-point rate hike will push up the Fed’s benchmark rate to a range of 4.5%-4.75%. Rates were close to zero last March.
Investors who trade in fed funds futures markets now expect the top end of the Fed’s benchmark rate to be 4.5% at the end of this year and 2.9% at the end of 2024, noted Ashworth.
The 10-year Treasury note
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yield has fallen to 3.49% from 3.89% in late December.
Heading into Friday trade, the S&P 500
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has bounced 15% from its October lows, and riskier assets have seen stronger moves: bitcoin
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is up 46% from late November levels.
“The Fed doesn’t want to engender the idea that they are ready to pause and at some point even cut rates,” said Kathy Bostjancic, chief economist at Nationwide.
Easier financial conditions from here might be like adding kindling to an inflation fire that isn’t blazing anymore.
To hold expectations, Powell will continue to press the theme that he doesn’t think the Fed is done, Bostjancic said.
He will also highlight concern over service inflation and wages.
After a quarter-point increase, Bostjancic thinks the Fed will raise rates by two more quarter percentage points — in March and May — before pausing. That would put the peak of the benchmark rate up to a range of 5%-5.25%.
She said that the Fed will be “laser-focused” on inflation despite the weaker economic outlook.
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Luke Tilley, chief economist for Wilmington Trust Investment Advisors, said he thinks the Fed will hike one more time in March and then pause.
Consumer prices are running at a 1.8% annual rate over the last three months, he noted.
“Even the more hawkish Fed members are having to recognize the low inflation data,” Tilley said.
Tilley said the Fed doesn’t have to signal it is preparing for a pause next week because the market is already expecting it.
Ellen Zentner, chief U.S. economist at Morgan Stanley, said the Fed will pause after Wednesday’s meeting.
“Our expectation remains firm that job gains slow meaningfully in the prints ahead, and that inflation remains moderate, enabling the Fed to pause at the upcoming meeting,” Zentner said.
Sen. Elizabeth Warren, the Massachusetts Democrat, made clear that she wants the Fed to stop raising interest rates.
“Early indications are that inflation is subsiding. So we need the Fed to take yes for an answer and stop jacking up interest rates at an historically high rate,” Warren said in an interview in Politico.
Stopping now would make it possible to avoid a serious recession, she added.
