The Federal Reserve will hold its final interest rate meeting of the year on Tuesday and Wednesday (12-13) and will announce its resolution early Thursday Beijing time. Due to the high possibility that the bank will discuss the issue of interest rate cuts at this meeting, the market is extremely concerned and holding its breath.
Currently, it is widely expected that the Federal Reserve will continue to hold its ground at this year's final policy meeting. Wall Street also expects that the Federal Reserve will warn against cutting interest rates in the short term, which goes against the expectations of some who expect the Fed to cut rates as early as March.
In summary, market observers are eager to see any signs that the most aggressive interest rate hike since the 1980s has come to an end.
"Raising the federal funds rate is not within the scope of discussion," said Wilmer Stith, bond portfolio manager at Wilmington Trust. "The question is, how long can the 5% rate last?"
Wilmington Trust Chief Economist Luke Tilley expects the Federal Reserve to suggest that it may have reached its peak in interest rate hikes.
He said, "I expect there will be some euphemistic wording that says we have reached the level of restriction and will continue to turn to the question of how high and how long the restriction will last."
The last time the Federal Reserve raised interest rates was in July. In the past two policy meetings, the Federal Reserve decided to maintain interest rates at a 22 year high of 5.25% -5.50%.
Currently, although many Federal Reserve officials are more confident that interest rates may be at an appropriate level to curb inflation, most still retain the possibility of further rate hikes and suggest that interest rates will remain high for a period of time. Some even suggest that more interest rate hikes are expected.
Powell still speaks the language of the eagle
Wall Street expects that Federal Reserve Chairman Powell will also take a tough stance, similar to the message he conveyed earlier this month in his speech at Spelman College, when he warned investors not to believe that the Fed has completed rate hikes and will soon turn to rate cuts.
On December 1st, he stated, "It is too early to confidently conclude that we have taken sufficient restrictive positions or speculate on when policies may relax." He also stated that the central bank is prepared to "further tighten policies at the appropriate time.".
Federal Reserve observers say that one reason Powell may choose to make tough remarks on inflation this week is that the financial environment has recently relaxed after the rapid surge in long-term bond yields this autumn.
The yield of the 10-year US treasury bond bond reached 5% in October, but it has now fallen back to about 4.25% - completely in line with the level in early September. At the same time, the US stock market is also soaring. The S&P 500 index has risen nearly 20% this year, while the Nasdaq Composite Index has risen nearly 38%.
Tilley said, "Powell may be a bit hawkish. They will try to build more barriers to convey that higher interest rates will be maintained for a longer period of time."
Weakening expectations of interest rate cuts
Wall Street expects that at the final meeting, Federal Reserve officials may try to cool expectations for a rate cut in 2024, and the latest version of the rate forecast will be released at that time. The so-called dot matrix may indicate that the interest rate cut next year will be even smaller.
Tilley predicts that the Federal Reserve will start cutting interest rates from next spring, with an expected full year rate cut of 0.75 percentage points, but not a full percentage point, to avoid further easing of the financial environment.
Goldman Sachs Chief Economist Jan Hatzius now predicts that a decrease in inflation will prompt the Federal Reserve to start cutting interest rates in the third quarter of next year, earlier than he had previously anticipated.
Hatzius expects to cut interest rates by nearly a full percentage point next year, but he stated that Federal Reserve officials will cut rates twice next year and by 125 basis points in 2025.
Not all observers agree on the actions of the Federal Reserve next year. James Fishback, founder and Chief Investment Officer of hedge fund Azoria Partners, said that the market is "far ahead" in terms of expected interest rate cuts in 2024.
Fishback insists that the condition for a 0.5 percentage point rate cut next year is for the Federal Reserve to raise interest rates at Wednesday's meeting. He said that maintaining interest rates at the current level can have a tightening effect.
"The market has already digested over 100 basis points of interest rate cuts until December next year. If the Federal Reserve only stays unchanged and lowers rates once, then compared to market expectations, they have actually raised rates three times, putting greater tightening pressure on the economy," he added.
Stith also stated that he believes inflation is still too high and the Federal Reserve cannot lower interest rates from the current level in the short term.
He said, "The market always returns to the saying that 'if economic growth is slow or not at all, the Federal Reserve will intervene and save the economy.' This is where I think market expectations are somewhat misplaced, especially considering the level of inflation and the level that the Federal Reserve is trying to bring inflation to."