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| There are still many unknowns about how the Fed will shape its policy outlook next year. (Source: CNBC) |
Markets are widening expectations that the Federal Reserve will leave interest rates unchanged, currently at a 22-year high, at its policy meeting on December 13. If it does, it will be the third consecutive time the Fed has cut rates, a scenario that most investors believe is a near certainty. The hot issue now, debated by most markets and analysts, is when the US monetary policy authority will start cutting rates, for how long and how fast.
Gregory Daco, chief economist at EY, said it was almost certain that no further rate hikes would be forthcoming. However, there are still many unknowns about how the Fed will shape its policy outlook for next year.
In recent statements, Fed officials have continued to warn that interest rates will continue to rise until the dual goals of 2% inflation and unemployment are achieved. Fed Chairman Jerome Powell said it was too early to announce a pause in rate increases, nor was there enough basis to speculate on when monetary policy might be eased.
According to the US Department of Labor's report on December 8, the number of non-farm jobs increased by 199,000 in November 2023, higher than the increase of 150,000 in the previous month. Low unemployment rate, stable job creation have brought positive signals of economic growth and reduced inflation. In October 2023, the US consumer price index (CPI) was 3.2%, down from the peak of 9.1% during the pandemic.
The string of positive economic data has raised hopes that the Fed will soon achieve its goal of a “soft landing” — reducing inflation and avoiding a deep recession for the world’s largest economy. Traders in futures markets see a more than 98% chance that the Fed will leave interest rates unchanged at its meeting this week, according to data from the Fed Watch tool.
But the timing of a rate cut remains a contentious question mark. “The discussion around monetary policy normalization will become more active next year as progress toward lower inflation continues,” economists at Deutsche Bank wrote in a recent market analysis report.
The US economy appears to be slowing in the final quarter of 2023, the Fed chairman said, noting a “cooling” in the labor market. He added that the Fed is on track to bring inflation down to 2% without leading to rising unemployment.
Cutting inflation while avoiding a recession — often called a “soft landing” — is a difficult challenge, but the Fed has recently suggested it may be on track to do so.
Austan Goolsbee, an official at the Federal Open Market Committee (FOMC), echoed Powell’s view that the Fed is aiming to meet its dual mandate of controlling inflation and unemployment. However, Goolsbee warned that policymakers should not be complacent and need to be alert.
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