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The Fed Isn’t Ready to Speculate on Rate Cuts — Yet

The Federal Reserve will likely hold interest rates steady for a third straight meeting, while pushing back against market expectations of rate cuts as soon as March.

The Federal Open Market Committee is poised to keep rates in a range of 5.25% to 5.5% at its two-day policy meeting ending Wednesday, a 22-year high first reached in July. The rate decision and an accompanying statement will be released at 2 p.m. in Washington. Chair Jerome Powell will hold a press conference 30 minutes later.

Powell has said it’s too early to speculate on when the central bank will start reducing interest rates. Instead, policymakers have emphasized their desire to pause and evaluate the impact of higher borrowing costs on the economy.

“The goal of messaging will be: ‘We’re not going to prematurely ease,’” said Lindsey Piegza, chief economist for Stifel Financial Corp. “They have seen head fakes on inflation. While the Fed has made progress, there’s more progress to be made.”

Forecasts

Wall Street will be focused on Fed officials’ forecasts for interest rates — the so-called dot plot — which will show how much the committee expects to cut interest rates in 2024 and 2025.

Economists surveyed by Bloomberg expect the median projection will show two rate cuts next year and five more in 2025, but there’s a high degree of uncertainty. Some Fed watchers see the FOMC penciling in a full percentage point of cuts in 2024 while others see no cuts at all.

The committee is likely to tweak its forecasts for inflation, too. Forecasters expect the median projection for 2023 to fall to 3.1% from 3.3% in September for the Fed’s preferred price gauge and to 3.5% from 3.7% for the measure excluding food and energy. Over the six months ending in October, core inflation ran at an annual rate of 2.5%.

Government data out Tuesday showed US consumer prices picked up in November, bolstered by increases in housing and other service-sector costs. The figures underscore the choppy nature of returning inflation to target.

What Bloomberg Economics Says…

“Two straight holds could be seen as a temporary pause, but we think three constitute an end to the cycle. Officials will deliberate the conditions under which they could start cutting rates next year.”

— Anna Wong, chief US economist

To read the full note, click here

The FOMC will also bump up its forecasts for 2023 growth in the wake of a very strong third quarter, while making little — if any — changes to its 2024 view, economists expect.

FOMC Statement

Nearly three out of four economists expect the Fed to retain its current guidance on interest rates, which would leave open the possibility of an additional rate hike. One quarter think it’s time that the committee adjust its statement to reflect the likelihood that rates peaked in July.

“There are likely to be minimal changes in the statement,” said Hugh Johnson, chairman of Hugh Johnson Economics LLC. “They are likely to emphasize that there is no plan that is imminent to reduce interest rates” and changes will depend on the data.

Press Conference

Powell is likely to reiterate his view, expressed in his speech Dec. 1 at Spelman College in Atlanta, that it’s premature to speculate on when policy might ease.

He’s likely to be asked whether he agrees with Fed Governor Christopher Waller, a leading inflation hawk, who acknowledged that the central bank would be willing to consider rate cuts if inflation continues to move lower. He’ll also be quizzed about his take on financial conditions, including a recent plunge in US Treasury yields.

“I am expecting Powell will maintain a somewhat hawkish tone,” said Stephanie Roth, chief economist at Wolfe Research LLC. “He hasn’t changed his tone as much as others on the FOMC, such as Waller, and financial conditions have eased materially over the past couple of weeks.”

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