A majority of the economists see the central bank leaving interest rates unchanged at the end of the meeting, even though inflation remains higher and above the targeted 2%.
The consumer price index-based inflation in the US rose 3.7% from a year ago in August, primarily due to the spike in gas prices. This was up from a 3.2% annual increase in July.
Even Though the inflation has cooled off significantly from the peak and moved closer to the Fed’s 2% target, the recent rise in oil and gasoline prices pose upside risks to inflation.
During its previous policy meeting in July the Fed committee had said that it will continue to assess incoming data and its implications for monetary policy.
Indicating that price pressures remain a pain point even after a significant moderation from the peak, the Fed said it was watchful to inflation risks and was committed to bring it down to its target of 2% annual increase.
In the minutes of the Fed’s previous meeting too, the central bank hinted at interest rates staying higher for longer amid inflation risks. According to the CME Fedwatch tool, 99% of the investors are expecting the Fed to leave the federal funds target range at 5.25-5.50%.
Given that the status quo has been largely factored into prices, the outlook for interest rate trajectory for the rest of 2023 is what will be closely tracked by investors across the globe on Wednesday.
“Markets expect the Fed to sound hawkish while pausing and indicate one more rate hike this year. The Fed’s forecast on the economy and rates will be crucial,” said Puneet Pal, head – fixed income, PGIM India Mutual Fund.
Besides the outlook on inflation, Fed’s assessment of the economy will also be closely tracked by the market.
On one side, inflation ticked up in August, and on the other side, the unemployment rate showed an unexpected increase, indicating a slowdown in the job market. Nonfarm payrolls, a data closely tracked by the Fed, grew by a seasonally adjusted 187,000 in August.
The Fed had said that tighter liquidity conditions for both households and businesses are likely to weigh on the economic activity and hiring.
Market movement since last meeting
Since the last meeting of the Fed, the Dow Jones Industrial Average has lost more than 2%, while the tech-heavy Nasdaq Composite has shed about 3%.
On the contrary, India’s benchmark Nifty 50 has gained about 2% in the same period and scaled lifetime highs.
Meanwhile, yield on the US benchmark 10-year treasury note has risen by a sharp 47 basis points since the Fed’s last policy meeting, while the dollar index has risen by more than 4% and moved past the 105 level.
Investors across the globe are hoping that Fed Chair Jerome Powell will take a slightly dovish stance on interest rates. But one needs to see if Powell can please the Street.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
