As the Federal Reserve gears up for its last policy meeting of the year, all eyes are on whether it will maintain interest rates or signal a potential shift in the future. The widely expected decision to keep rates steady is anticipated, but market observers are on the lookout for any hints of rate cuts in the near future.
Contrary to some expectations on Wall Street that projected easing as early as March, the consensus among analysts is that the Federal Reserve will caution against rate cuts in the coming months. Investors are eager for any signals indicating the conclusion of what has been the most aggressive rate-hiking campaign since the 1980s.
Wilmer Stith, Bond Portfolio Manager for Wilmington Trust, emphasizes that the focus is now on how long interest rates will remain at the current level of 5%. Luke Tilley, Chief Economist at Wilmington Trust, predicts that the Fed may suggest it has reached the peak of rate hikes, introducing language that hints at the question of duration and height.
Despite the Fed keeping interest rates unchanged in its last two policy meetings at a range of 5.25%-5.50%, inflation, a key concern, has been gradually moving closer to the central bank’s 2% target. The Fed’s favored inflation measure, the core Personal Consumption Expenditures index, showed a decrease to 3.5% in October. However, the market is still uncertain about the Fed’s stance on potential rate hikes, with many officials suggesting rates will remain elevated for some time.
Fed Chair Jerome Powell is expected to adopt a hawkish tone, cautioning against assuming the Fed has finished raising rates and will soon turn to cutting. Powell’s inclination to discuss inflation may stem from recent easing in financial conditions, with long-term bond yields retracting from their October peak.
Market observers anticipate the Fed may temper expectations for rate cuts in 2024 when an updated dot plot is released. The dot plot could reveal fewer rate cuts for next year, aligning with adjustments made in September. Forecasts on inflation, GDP growth, and unemployment will also be closely watched.
While Wall Street is pricing in a near 100% chance that rates will remain unchanged, there is also speculation about the possibility of a rate cut as early as March. Analysts like Luke Tilley foresee rate cuts starting next spring, with expectations of a full percentage point in rate cuts in 2024.
However, not all market observers agree on the future course. Some, like James Fishback, Founder and CIO at hedge fund Azoria Partners, caution that the market may be overly optimistic in pricing rate cuts for 2024. Fishback suggests that holding rates steady at the current level could exert a form of tightening on the economy, especially if the Fed maintains a more hawkish stance.
The market’s expectations, particularly regarding the Fed’s response to inflation and the trajectory of interest rates, remain a point of contention among analysts, with varied predictions for the central bank’s actions in the coming year.
