Summary
Fed’s policy rate likely to remain in 5.25%-5.50% range
US economy has defied expectations of a slowdown
All eyes on Powell for clues to monetary policy outlook
WASHINGTON, Nov 1 (Reuters) – Throughout its two-year battle with inflation, the Federal Reserve has tried to squeeze consumers hard enough through higher interest rates that they stop spending, bring demand in line with supply, and drive U.S. economic growth below its potential to ease price pressures.
It hasn’t happened yet.
With financial markets expecting the U.S. central bank to keep interest rates on hold at the end of a two-day policy meeting on Wednesday, policymakers now have to judge whether the economy’s stronger-than-anticipated performance is a last gasp of the consumer splurge that began during the COVID-19 pandemic, or evidence that monetary policy still isn’t strict enough to fully return inflation to the Fed’s 2% target.
Since the last policy meeting in September, when the central bank’s policymakers also left rates unchanged, incoming data has shown stronger-than-expected job growth, stronger-than-anticipated economic growth, and only sluggish improvement in the pace of inflation that, at 3.4% in September based on the Fed’s preferred gauge, remains well above the target.
There are reasons for the central bank to be, as policymakers have said, “careful” in approving any further rate increases. Most notable are market-based interest rates that have been driven higher by investors independent of any action by the Fed: Yields on long-term U.S. Treasury bonds have spiked since last summer and the average rate on a 30-year fixed-rate mortgage has climbed to close to 8%, a level not seen in nearly a quarter of a century. Ultimately, Fed officials feel these developments will slow business and household spending.
But recent weeks have provided little clarity on when that might happen, with long-awaited turns lower in hiring, housing inflation, services spending and other key data points postponed by an economy that won’t quit.
Even the rise in bond yields, cited by some Fed officials as a substitute for the central bank’s own rate hikes, may simply be a recognition of the economy’s strength and an implicit sign the Fed may have to do more to finish the inflation fight.
“We think real rates are higher due to very strong US growth,” analysts from Citi wrote ahead of this week’s Fed meeting. “If we are right, the Fed risks falling behind the real growth and inflation curve,” even if the economy slows from the torrid 4.9% annual pace seen in the third quarter.
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DOUR CONSUMERS STILL SPENDING
The U.S. central bank is due to release its latest policy statement at 2 p.m. EDT (1800 GMT). Fed Chair Jerome Powell will hold a press conference half an hour later.
Investors consider it a near certainty that the central bank will keep its benchmark overnight interest rate in the 5.25%-5.50% range that was set at its meeting in July, with the odds also weighted…
Article from www.reuters.com