Fed meeting. Fed is expected to hold rates steady on December 13, 2023. Wall Street is eagerly awaiting the Federal Reserve’s last interest rate decision of the year, hoping for signs that its rate-hiking campaign is over. Wall Street will be listening for any hints of cuts.
The Federal Reserve is widely expected to hold interest rates steady this Wednesday during the central bank’s last policy meeting of the year. It is also expected to caution against making rate cuts anytime soon, defying the expectations of some on Wall Street who expect that easing to happen as early as March.
Market observers are eager for any sign that the most aggressive rate-hiking campaign since the 1980s is over. “Raising the Fed funds rate is off the table,” Wilmer Stith, bond portfolio manager for Wilmington Trust, said. “The issue is how long are we going to be at 5%?”
Luke Tilley, chief economist at Wilmington Trust, predicts the Fed will hint it may have reached the peak on rate hikes. “I expect there will be some couched language that says we’ve reached a level of restrictiveness and continuing to turn towards the question of how high for how long,” he said.
The Fed last hiked rates in July and has elected to keep interest rates unchanged the past two policy meetings in a range of 5.25%-5.50%, a 22-year high.
Inflation, which the Fed is trying to cool, continues to drop closer to the central bank’s 2% target. The Fed’s favored inflation measure — the core Personal Consumption Expenditures index, which excludes volatile food and energy prices — clocked in at 3.5% for the month of October, down from 3.7% in September and 4.3% in June. The Consumer Price Index on a core basis showed inflation rose 4% in November, the same clip as in October.
Inflation has now fallen below where the Fed expected it to end the year. While many Fed officials are feeling more comfortable that rates are likely at the right level to bring down inflation, most are still keeping the option of another rate hike on the table and suggesting rates will remain elevated for some time. One has even said more hikes are still expected.
Fed Chair Jerome Powell is also expected this Wednesday to strike a hawkish tone, similar to the message conveyed in his address at Spelman College earlier this month when he warned investors not to assume the Fed is finished raising rates and will soon turn to cutting.
“It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease,” he said on Dec. 1, adding that the central bank is prepared to “tighten policy further if it becomes appropriate to do so.”
One reason Powell may choose to talk tough on inflation this week, Fed observers say, is because financial conditions have loosened recently after long-term bond yields soared rapidly this fall.
The yield on the 10-year Treasury hit 5% in October but has come back down to around 4.25% — exactly where it was in early September. Meanwhile the stock market is also roaring higher. The S&P 500 is up nearly 20% this year and the Nasdaq Composite has gained nearly 38%.
“Powell is going to err on the side of being a little hawkish,” said Stith. “They’re going to try to build more of a wall up that conveys we’re higher for longer.”
This Wednesday Fed officials could temper expectations for rate cuts in 2024 when an updated version of interest rate expectations is released. The so-called dot plot could show fewer rate cuts for next year, which members already curtailed in September.
Forecasts on inflation, GDP growth, and unemployment will also be released. Wall Street is pricing in a near 100% chance rates are left unchanged Wednesday while also pricing in the chance for a rate cut as soon as March.
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