FOMC Preview: A Fed Pause Today Doesn’t Mean The Inflation Fight Is Over

The Federal Reserve meets this Wednesday to announce its latest interest rate decision. Rates are expected to remain constant unless there is a significant surprise. The Federal Open Market Committee is expected to keep rates constant in the 5.25% to 5.5% range during its meeting on September 19th-20th, according to the survey, and is forecasted to remain there until the first cut in May of next year - two months later than analysts initially predicted.


What matters is the future signal sent by the Federal Open Market Committee. The market's reaction hinges on the projections published by the Fed in the form of its famous 'dot plot' contained in their quarterly Summary of Economic Projections as they upgrade their view of the US economic outlook.


The Fed has been raising interest rates since March 2022, and this could be the second rate pause since then. Markets anticipate Chairman Jerome Powell to use this opportunity to deliver a hawkish tilt since inflation still remains high despite some easing.


The two significant uncertainties are whether authorities will stick to their forecast of one more 25 basis-point boost by year's end and how much easing is planned for 2024. They predicted one percentage point of cutbacks in June.


According to an Oxford Economics study of company executives, they expect the Fed's rate-cutting effort to last until 2025, implying that the central bank still has a long way to go.


All data suggests that inflation isn't totally under control, and the continuous rise in crude oil prices is fueling fears of much greater pressure. Core inflation remains overly high, and the economy is doing better than many analysts anticipated.


A strong US economy will drive the Federal Reserve to boost interest rates again this year and keep them at their top level for longer than previously anticipated next year. Economists are progressively becoming more optimistic about the US economy's prospects, with 45% expecting a recession in the next 12 months, down from 58% in July and 67% in April. Fed officials have joined the soft-landing optimism, with the Fed staff swinging from a recession forecast earlier this year to a continuation of the boom.


During the June meeting, the Fed's dot plot indicated one more rate hike from current levels and four rate cuts by the end of 2024, with the first scheduled in May. Swaps contracts linked to Fed decisions now reflect less than 100 basis points of cuts. Investors could expect the dollar to benefit if the dot plots show fewer rate cuts projected for next year.




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